Mortgage Market Woes Gather Steam and More Victims

Implications: The US housing and mortgage crisis has mushroomed into a new level of adversity. When will this bleeding subside and ultimately come to an end? Is the market near a bottom yet? Are there any upside opportunities? Will the bank, thrift and mortgage industry's pain turn into someone's gain?

Analysis: While political, regulatory, and mortgage industry initiatives all seek answers for this crisis, the only real result has been widespread daily media coverage of the problems, which keep expanding and impacting new players. More questions pop up every week and answers are either elusive or turn out to be illusions. Recognized losses will pass $200 billion in 2008. Mortgage delinquencies and foreclosures continue to go up while home sales continue to fall. The credit crunch is now well established beyond just subprime mortgages.

1. Expect at least three years (2007 - 2009), possible five years (2010, 2011), before the bleeding stops and loan volumes and earnings recover. The mark-to-market process is affecting not just mortgage securities and properties acquired through foreclosure. Examinations will raise questions about sub standard and doubtful real estate loans, which will produce lead to more loan loss reserves.

2. Some home lenders have restricted or eliminated mortgage lending in sharply declining housing markets (referred to as blacklisting), driving prices and values lower. In some cases, lenders have ruled out entire geographic regions or types of homes, such as Las Vegas or Miami condos.

3. Streamlining the deed in lieu of foreclosure processing, removing state law barriers to help lenders move on with the recycling of property would help. So would the FDIC's pending move to pay off mortgage bond holders at failed institutions, removing FUD from a viable liquidity alternative. Establishing a uniform, fair equity sharing (between homeowners and lenders) for restructured loans that forgive part of the loan balance would encourage lenders to accelerate recovery initiatives.

4. Big FDIC insured mortgage lenders are crippled and will struggle to stay independent. Raising new capital will be a survival differentiator. The list includes Washington Mutual, IndyMac Bank, Downey Savings, FirstFed Financial, and BankUnited. Large independents like GMAC's ResCap may not make it. Few, if any, Mortgage REITs will survive and prosper.

5. Watch out for similar credit loss firestorms in indirect auto finance and credit card portfolios. Another entire credit sector that is holding its breath is the commercial real estate market, particularly in the hardest hit residential markets (Nevada, Florida, Arizona, California). Consumers that have been pushed out of homes and/or cars have begun to spend less, leaving retail strip malls and smaller retailers at risk.

6. Firms that are best positioned to weather the storm and end up stronger and in a better position are all very well capitalized and have strong, diverse earnings. Examples include both big institutions (US Bancorp, Wells Fargo, GE Capital/Money) and regional banks (Bank of Hawaii, Commerce Bank of Missouri).