| New alarm: Option-ARM 'liar's loans'
The no-worries lending that inflated the housing bubble is resulting in a flood of soured option-ARM loans, adjustable-rate mortgages that allow borrowers to pay so little every month that their loan balances rise rather than fall, sometimes sharply.
Numbers from industry trackers suggest that these borrowers, most of whom boast respectable and often top-tier credit scores and appear to have substantial incomes and home equity, are starting to create a second tide of defaults for lenders swamped by the meltdown in subprime loans made to people with bad credit or overstretched finances.
Countrywide Financial Corp., the top option-ARM lender, will be hit hard. Already reeling from the subprime mess, Countrywide was rescued from possible bankruptcy this month by Bank of America Corp., which agreed to acquire it for about $4 billion.
JP Morgan loses $1.5bn on risky mortgages
JP Morgan Chase & Co's quarterly profit fell a worse-than-expected 24 per cent as the bank lost $US1.3 billion ($1.5 billion) on risky mortgages and set aside more money for rising losses on home-equity loans. Investors, however, rewarded JPMorgan for turning a profit while some US banks post huge losses from bad bets on subprime mortgage-related securities. JPMorgan shares were up 7 per cent in afternoon trade. JP Morgan chief executive Jamie Dimon was bearish about consumer credit quality, but he said rough financial markets made it more likely the bank would make an acquisition. Still, JP Morgan has significant exposure to cash-strapped US consumers who face higher energy and food costs while they watch the value of their homes slide. "Though the numbers were slightly weak, you have to give Jamie Dimon credit for avoiding most of the problems that have plagued his competitors," said Thomas Russo, a partner at Gardner Russo & Gardner, where he helps invest more than $US3 billion.
Not So Benign Neglect
At $213bn, y-t-d Home Equity ABS sales are 51% off last year's pace. Year-to-date US CDO issuance of $274 billion is running 2% below 2006 sales. Fed Foreign Holdings of Treasury, Agency Debt last week (ended 10/10) increased $5.5bn, surpassing $2.0 TN for the first time. "Custody holdings" were up $252bn y-t-d (18.2% annualized) and $317bn during the past year, or 18.8%. Federal Reserve Credit last week declined $3.3bn to $858.3bn. Fed Credit has increased $6.1bn y-t-d and $27.2bn over the past year (3.3%). International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.050 TN y-t-d (28% annualized) and $1.189 TN year-over-year (25.4%) to a record $5.861 TN. Credit Market Dislocation Watch: October 10 - Financial Times (Saskia Scholtes): "Banks and investors are still struggling to value mortgage securities backed by subprime home loans more than four months after valuation disputes came to light...
|
