Interest Rate Roundup

Monday, April 02, 2007

So much for the lack of Alt-A spillover ...

Interesting news out from M&T Bank. The company just issued a first-quarter earnings warning, saying it would make about $1.50 per share to $1.60 per share (Reuters consensus was $1.86). What's the problem? Have a look ...

"Recent, well-publicized problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative ("Alt-A") residential mortgage loans that M&T actively originates for sale in the secondary market. Alt-A loans originated by M&T typically include some form of limited documentation requirements, as compared with more traditional residential mortgage loans. Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter.

"At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected. In accordance with generally accepted accounting principles, loans held for sale must be recorded at the lower of cost or market value. As a result, the carrying value of M&T's Alt- A portfolio that had been held for sale was reduced by $12 million in the first quarter of 2007, which M&T estimates will result in an after-tax reduction of net income of $7 million in the quarter, or $.07 per diluted share.

"Management of M&T believes that the value of the Alt-A residential mortgage loans it holds is greater than the amount implied by the few bidders presently active in the market. As a result, $883 million of Alt-A loans previously held for sale (including $808 million of first mortgage loans and $75 million of second mortgage loans) were transferred in March to M&T's held- for-investment residential mortgage loan portfolio."

That last part is particularly interesting. M&T is saying it's taking its ball and going home because the mean old market bullies aren't paying enough for its product. Maybe this is just a temporary liquidity crunch, and maybe M&T will ultimately fare better by pulling product now, holding on to it, then selling later when liquidity improves. But I have a sinking feeling this downturn in subprime and the Alt-A market is going to be with us for some time. What if bids keep falling as a result?

Incidentally, M&T also said it would tighten lending standards and that repurchase requests from investors were rising, in part due to an increase in early payment defaults. In other words, Alt-A is seeing many of the same problems as subprime. Is anyone besides Ben Bernanke surprised?

Just a quick update as well: New Century Financial has now officially filed for bankruptcy protection. The company last year made almost $60 billion in mortgages, making it the biggest home loan firm to fail in the subprime shakeout.


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