Thursday, February 08, 2007

Home Lenders Plunge as More Subprime Mortgages Sour

Massive losses at subprime lenders in the US How many lenders in India are in a similar boat ?

Feb. 8 (Bloomberg) -- Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected.

The stock of Irvine, California-based New Century fell $10.92, or 36 percent, to $19.24 in New York Stock Exchange composite trading, the biggest decline since October 1998. Accredited Home Lenders Holding Co. lost 6 percent to $27.25, Novastar Financial Inc. tumbled 11 percent to $18.31 and American Home Mortgage Investment Corp. slid 8.1 percent to $33.06.

Both New Century and HSBC blamed rising defaults on so- called subprime loans they made to borrowers who had little credit history or heavy debt loads. Defaults on subprime loans increased nationwide last year as competition and a slower housing market prompted lenders to lower their standards and give mortgages to borrowers who couldn't make their monthly payments.

``It's kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,'' said Brian Horey, general partner at Aurelian Partners LP in New York, which has sold short shares of New Century. ``If you could fog a mirror, you could get a loan.''

New Century, the second-largest subprime lender, said late yesterday it probably lost money in the last quarter and will need to restate 2006 earnings, and the company won't make as many loans this year as it had previously forecast.

Wider Impact

HSBC, the world's third-largest bank by market value, announced a management shakeup today after setting aside $1.76 billion more than analysts estimated to cover bad loans in 2006. Shares of the London-based bank fell as much as 2.6 percent, the most in eight months. They closed down 14 pence, or 1.5 percent, at 917 pence in London.

Other big declines at mortgage companies included Fremont General Corp., which fell 11 percent to $12.41, and Fieldstone Investment Corp., down 12 percent to $2.97.

The damage spread to stocks of other companies including H&R Block Inc., which is trying to sell its Option One home lending unit. The shares fell as much as 3.6 percent, closing with a 1.3 percent loss at $24.52.

Washington Mutual Inc., the nation's biggest thrift, Countrywide Financial Corp., the largest independent mortgage lender, and IndyMac Bancorp Inc. each shed more than 2.5 percent.

Among subprime loans, delinquencies of more than 90 days plus foreclosures and seized properties are at their highest level in at least six years, according to a Friedman Billings Ramsey Group report.

Goldman Sees Trouble

``That is the one area across all businesses in all firms that is actually in a bit of trouble now,'' David Viniar, chief financial officer of New York-based Goldman Sachs Group Inc., said today about subprime lending. ``That market's going to get worse before it gets better.'' Viniar spoke at an investor conference in Naples, Florida.

Cooling demand for the mortgages spurred lenders including Wachovia Corp. and KeyCorp to shut or sell home-loan units in the past year. National City Corp. sold its First Franklin mortgage unit to get some of the riskiest loans off its books.

``There's a lot of camouflaging going on in credit quality,'' said analyst David Hendler at CreditSights Inc. in an interview late last month. ``We're getting the sense in this shop that this is more than normal deterioration, that it speaks to deeper difficulties.''

Layers of Risk

Washington Mutual CEO Kerry Killinger blamed worse-than- expected erosion in credit quality among subprime loans for a $122 million fourth-quarter loss at the Seattle-based company. At IndyMac, CEO Michael Perry told shareholders Jan. 16 the Pasadena, California-based lender missed its own profit forecast as defaults increased.

``The banks have headwinds that will make it tough for them to outperform the broader market this year,'' said Chris Hagedorn, a money manager at Fifth Third Asset Management in Cincinnati. Hagedorn, whose company oversees $21 billion, wonders why bankers aren't more pessimistic. ``I got the sense that they're saying we're just at the start of this thing,'' he said on Feb. 5.

Federal Reserve Governor Susan Bies said last month regulators are particularly worried about lenders that added layers of risk by combining low down payments with low documentation, or with interest-only loans that allow borrowers to skip payments and add the sum to the total amount of the loan.

The Fed added a special set of queries on bad loans to its regular quarterly survey of senior loan officers. The Feb. 5 report found half expect credit quality on non-traditional mortgages, such adjustable-rate and interest-only loans, to get worse in 2007. In response, more banks tightened lending standards in the past three months than in any quarter since the early 1990s, the survey said.

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