Bad Loans Hit Housing Lenders

On a good day for homebuilder issues, shares of mortgage lenders fell on new worries about borrowers' ability to pay

What was good news in the market for homebuilders on Jan. 17 didn't carry through for mortgage lenders, as investors worry that bad loans are hitting that sector. Wall Street sold mortgage bank stocks further after Indymac Bancorp (NDE) issued a profit warning on Jan. 17.

The Pasadena (Calif.)-based holding company for the savings, loan, and mortgage originator Indymac Bank said in a letter to shareholders on Jan. 16 that it expects to earn about 97¢ per share during the quarter, instead of the $1.30 to $1.40 it had announced earlier.

Anticipating Further Erosion

"This shortfall reflects the challenging times being faced by the mortgage and housing industries and the difficult nature of forecasting earnings in our business," Chief Executive Michael Perry said in a press release. "I have stated many times before that Indymac is not immune to deteriorating mortgage industry conditions, and it is clear now that during the fourth quarter industry conditions continued to erode." He noted challenges such as higher credit costs related to delinquent loans.

That was enough to make investors reassess that segment of the housing story, even as they bought into shares of major homebuilders such as Centex (CTX), Toll Brothers (TOL), Lennar (LEN), D.R. Horton (DHI), and Pulte Homes (PHM). Lennar CEO Stuart Miller cheered investors on Jan. 16 with comments suggesting that this year could be better than 2006 for his company (see, 1/16/07, "Homebuilders: Will '07 Be a Rebuilding Year?"). Centex added 2.3%, to $52.80; Toll was up 1.1%, to $31.68; Lennar gained 4.5%, to $51.95; D.R. Horton rose 2.4%, to $26.97; and Pulte added 4.2% to close at $32.81.

High-Risk Loans

But Indymac continued its slide with a 3.3% loss to close at $39.15 per share on the New York Stock Exchange, then lost another 1.9% in after-market trading. Countrywide Financial (CFC) fell 1.3%, to $40.81 per share, while Seattle-based Washington Mutual (WM) lost 0.8% to settle at $43.73 per share on the NYSE.

Standard & Poor's analyst Stuart Plesser downgraded Countrywide to sell from hold on Jan. 17, citing the fact that about 9% of the bank's mortgage production is from subprime loans targeted at higher-risk borrowers. And about 44% of the loans in Countrywide's bank portfolio are option ARM loans, which are advertised to give consumers more repayment flexibility, but add unpaid interest into the loan's principal. "These loans have performed well until now, but they haven't been stress-tested, by design. "We see such testing occurring sometime in '07," Plesser said in a research note. "We are concerned about CFC's credit exposure."

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