Interest Rate Roundup

Thursday, October 19, 2006

Mortgage sector mayhem

WM and LEND aren't having a very good day. In fact, both stocks are going up in smoke this morning due to significant profit problems. A few data points ...

* Wamu missed earnings estimates by 9 cents per share, on a continuing operations basis. The company's mortgage unit went from earning $302 million a year ago to losing $33 million in Q3.

* Accredited Home Lenders said per-share profit would fall short of its previous forecast range of $4.50 to $5. The problem: Punk origination volume, weak secondary market conditions and rising delinquencies.

The fact is, when you get stagnant to falling home values, it shuts off the "free money" equity liquidation valve. And when you look at the kinds of Frankenstein Financing loans that were made recently, the surge in late payments should surprise no one. The fact is, there has been an utter degredation in mortgage standards for the past couple of years ... and it's time to deal with the fallout.

Also worth noting: WM said it will likely boost loan loss provisions by $200 million in 2007. My belief is that you'll see a lot of extra provisioning over the next several quarters throughout the banking industry. Not only is credit quality starting to sour, but reserves are also at extremely low levels, historically speaking. In fact, the FDIC's Quarterly Banking Profile report for Q2 2006 points out that "the industry's ratio of reserves to total loans and leases fell for the fourteenth quarter in a row. At 1.10 percent, it is at its lowest level since 1985."


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