A handful of banks, mortgage lenders, and mortgage insurers were downgraded this morning by Citigroup, who cited ongoing credit problems coupled with falling home prices.
“We expect consumer lenders and insurers to face further credit challenges as home prices decline 3% to 5% in each of the next two years, mortgage rates reset and the macro economy slows,” a Citi analyst said.
“Moreover, tightening lending standards and underwriting practices should initially compound the problems, making it generally more difficult for consumer lenders to grow out of the downturn,” the analyst added.
Countrywide, Bank of America, JPMorgan Chase, Wachovia, Wells Fargo, PNC, First Horizon, and MGIC were all downgraded from “buy” to “hold”, while Radian, Capital One, U.S. Bancorp, M&T Bank, and Comerica were cut from “hold” to “sell”.
Banks, along with mortgage lenders and insurers, have been battered this year as related companies continue to announce record losses amid one of the worst housing downturns in recent history.
“We believe the likely further deterioration in mortgage-related delinquencies and losses, market dislocation around mortgage securities, and some bleeding-through of credit weakness into other consumer categories should put pressure on earnings growth and returns for most of 2008,” Citi noted.
“The key question is whether now is the time to try to buy on weakness after significant underperformance, but our review of the credit trends shows that we are very early in the credit cycle,” Citi concluded.
Despite the downgrades, many of the affected companies were trading slightly higher in midday action on Wall Street.