Fresh Mortgage Warnings Rattle Markets

November 12, 2007 No Comments »

A slew of banks and lenders rattled financial markets early Monday with fresh mortgage-related warnings, indicating that the credit crunch is alive and well.

Countrywide, the top U.S. mortgage lender, said it expects weaker loan origination volumes for the remainder of 2007 and in 2008, while it noted that credit costs would remain at “elevated levels” through next year.

“The value of our inventories of non-conforming loans held for sale, as well as other mortgage-related assets, have continued to fluctuate after September 30, 2007 but credit spreads have generally widened. We expect that the values of these assets will continue to fluctuate in the foreseeable future,” the company said.

The lender also warned that its access to the public corporate-debt markets “could be severely limited” if credit agencies cut its debt to junk status, once again raising intense liquidity fears.

Meanwhile, shares of E-Trade nosedived more than 50 percent after the brokerage warned that it expects “significant write-downs” in its $3 billion asset-backed securities portfolio, and would no longer meet previous earnings forecasts as a result.

Citigroup analyst Prashant Bhatia said in a research note that the company could lose over $5 billion if it attempts to liquidate its loan and asset-backed securities portfolio as a result of losing its funding sources.

Bhatia, who downgraded the company to a “sell” rating, said E-Trade faces a 15% chance of bankruptcy.

The U.S. Securities and Exchange Commission is also investigating whether its Capital Markets division executed orders ahead of customer orders between 1999 and 2005.

E-Trade President and Chief Operating Officer Jarrett Lilien attempted to reassure investors by stating on the company’s website, “We could absorb an immediate writedown in excess of $1 billion and still remain well capitalized.”

The worry now is that depositors will flee the brokerage, much like they did at Countrywide and Northern Rock.

UK banking giant HSBC is set to announce third quarter earnings Wednesday, and many speculate that its U.S. unit, HSBC Finance, will reveal an additional $1 billion in exposure to bad mortgage debt.

The banking giant has already exited much of its U.S. mortgage business, including the closure of subprime lender Decision One in September and a recent halt to the U.S. mortgage-backed securities trade.

Finally, UK-based Barclays Plc continues to deny that it will announce a whopping $10b exposure to bad US mortgage debt later this month.

Last week, Bank of America, JP Morgan, Wachovia, and Morgan Stanley all announced further mortgage-related losses.

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