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Mortgage Credit Woes Contribute to Stock Sell-Off
By Ted Cornwell
Wonder why the most widely followed stock indices are off 4% from their high points? It shouldn't surprise readers here that mortgage payment woes are a key factor behind uneasiness regarding the economy.
Third-quarter results from the mortgage industry have been more worrisome than reassuring so far. And Countrywide Financial Corp., perhaps the industry's biggest worry, doesn't even report until the end of this week.
But other stalwarts have, and they point toward continuing credit deterioration and a lack of "visibility," as analysts like to say, about when the housing sector will hit bottom and start to improve.
You know the industry stalwarts are in for some rough sledding when an analyst puts out a report titled, in part, "How Bad Can It Get" for the once-highflying Washington Mutual. But Friedman Billings Ramsey says it could get pretty ugly. In downgrading WaMu's stock to underperform, the investment banking outfit said "the housing market is eroding much faster than anybody could have anticipated," noting that WaMu has revised its provision for loan losses by $2 billion in total over the past two months.
The problem is WaMu is not alone. The same trends driving mortgage defaults and losses higher at WaMu are affecting the entire industry. And WaMu, along with other lenders, may have to revise its loss estimates higher yet again before the carnage is over. Current market conditions mean that a 2% charge-off rate cannot be ruled out for any mortgage-related company, FBR said.
WaMu itself acknowledged in its third-quarter earnings report that the damage from the housing downturn may continue to crimp results. During a conference call with investors and analysts, WaMu's chief financial officer, Tom Casey, noted that there is a silver lining for owners of mortgage servicing rights. The slowdown in home price appreciation - indeed, pricing are falling in many markets - meant that prepayment speeds were slower than expected. WaMu posted $222 million income for WaMu during the third quarter, despite writedowns in the value of its housing loan portfolio. That was offset by an increase in loan loss reserves for home loans of the same amount. All told, nonperforming loans rose to 1.65% of total assets for WaMu in the third quarter, more than double the nonperforming rate from one year earlier.
Similarly, Wells Fargo posted stronger-than-expected gains related to interest-rate risk management on its MSR asset, boosting its mortgage earnings despite a big increase for loss reserves on home-equity loans. Wells, unlike many of its competitors, eschewed originating the riskiest set of subprime loan products, and hasn't taken as large a hit to its mortgage holdings as some rivals.
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