Lenders Mostly Able to Handle ARM Reset Markdowns
As a coalition of originators, servicers and investors guided by Treasury Secretary Henry Paulson finalize a plan to address the subprime mortgage ARM reset problem, CreditSights believes that most big banks will be able to handle expected increased markdowns in the next five quarters.
To bring major lenders together and create a joint solution that provides near term relief remains highly significant, CreditSights says, especially in light of the roughly $450 billion of mortgages facing rate resets by the end of 2008. “Moreover, the reported involvement of MBS/ ABS investors (including the American Securitization Forum) also represents a meaningful milestone in our view as it seems investors are acquiescing somewhat with respect towards reducing the level of interest payments in securitization trusts rather than potentially forcing immediate foreclosure actions.”
CreditSights says it seems that this is the beginning of a legitimate “sharing of the pain” solution to a systemic failure of checks and balances in the mortgage originating/investing businesses. There are political and social aspects to the crisis that requires government and other system players to mitigate the blows and then regroup and create checks and balances that can prevent future problems like this from arising.
With so many homeowners possibly forced to leave their homes in foreclosures, a flushing of the system solution does not seem practical at this point in our opinion. Still, we believe that despite these prudential solutions, that mortgage-related loan losses should continue.
Other highlights of CreditSights U.S. Financials: Mortgage Mess Stress Test:
- Most big banks seem to be able to handle higher potential provisions/markdowns within 1 year of forward earnings
- Washington Mutual probably needs to cut or eliminate its dividend to earn-back potential charges in a more reasonable timeframe and to avoid further ratings pressure.
- Countrywide could have trouble registering significant earnings since its provisioning should be heavy in 2008.
- ResCap could have significant mortgage loan provisioning/markdowns and very high potential home builder loan/investment provisions/writedowns for 2008.
Meanwhile the Wall Street Journal reports that more than half of subprime mortgages went to borrowers with good credit scores in 2005, the peak year for such loans. While this shows the extent to which subprime loans have spread, it also contains a glimmer of hope.
Credit-worthy borrowers holding subprime loans may turn out to serve as a sort of shock absorber for the current mortgage crisis. They may be more likely than traditional subprime borrowers to withstand the double whammy of declining home prices and adjustable-rate mortgages soon due to reset at higher interest rates.
THE Journal says the data perhaps explain why, so far, nearly 80% of the borrowers with subprime loans have continued to keep their loan payments current, according to some analysts. That could indicate the crisis won’t continue to deepen as much as some fear. “But the situation also means that many otherwise credit-worthy borrowers are stuck with subprime loans whose costs may rise, which could harm them financially and further tighten pressure on the U.S. economy.”
The CreditSights report U.S. Financials: Mortgage Mess Stress Test can be purchased here.
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