Before the bell Monday morning, securities firm Lehman Brothers downgraded several mortgage lenders, including Countrywide, IndyMac, and Washington Mutual.
The firm cited the ongoing problems in the mortgage finance sector, and said that loan losses were likely to get larger.
Lehman cut Countrywide and IndyMac from “equal weight” to “underweight”, while downgrading WaMu from “overweight” to “equal weight”.
Countrywide dipped below its 52-week low, opening at $14.58 on the news, while both IndyMac and WaMu hovered above their lows for the year.
Mortgage insurers weren’t immune to the downgrades either, with both Radian Group and MGIC Investment Corp assigned “underweight” ratings, and PMI Group dropped from “overweight” to “equal weight”.
Radian and MGIC also hit new 52-week lows, while PMI Group hovered just above its annual low, with increased loan defaults and delinquencies expected to slice earnings of the mortgage insurance companies.
Lehman analyst Bruce Harting said he expected residential mortgage credit to fall to levels found during the recession in the early 1990s.
“We would steer clear of the majority of our residential mortgage universe until there is visibility on just how severe the current downturn will be,” Harting wrote in a client note.
Harting also noted that the mortgage crisis would spill over into other sectors of consumer finance, further stifling the economy.
“The hefty expected losses in the mortgage sector cannot happen in a vacuum,” Harting warned. “We cannot remember a period in recent history when financial stocks in our sectors went up in the face of rising credit losses, let alone the early stages of rising credit losses.”
Translation: Things will get worse before they get better, and they will have far-reaching consequences.
Harting said the U.S. credit crunch could result in mortgage-related losses as high as $242 billion, and that only a fraction have been realized to date.