More financial distress on the way

12 September 2008 1 views No Comment

Take a look at the frightening news coming out of Bloomberg:

Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods, according to RealtyTrac Inc., an Irvine, California-based foreclosure data provider. About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Of the Alt-A borrowers, 70 percent may have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland.

Let’s do some quick math here. 16% of $1 trillion = $160 billion.

Now, take the major investment houses. Merrill, Morgan Stanley, Lehman. Many of these places traded in securities leveraged on Alt-A loans, to the tune of up to 30x.

That’s almost $5 TRILLION.

As the Alt-A mortgages decay, if the 16% past 60 days late turn into defaults, there’s just not enough money in the economy to bail out those mortgages or the securities built on them.

Who’s going to be at most risk for these loans?

Wachovia Corp. (ticker: WB), with $122 billion, and Washington Mutual Inc. (ticker: WM), with $52.9 billion, were the U.S. lenders with the most option ARMs on their balance sheets at the end of the second quarter, according to regulatory filings. Both ousted their chief executive officers, Wachovia in July and Washington Mutual on Sept. 8, over failure to stem mortgage losses.

As Lehman Brothers did with Campus Door, expect that if these banks run into trouble, they’ll sacrifice any student loan services they have in the interests of survival.

This roller coaster ride is far from over, unfortunately. Buckle your seatbelts – we’re on the ride until at least 2011.

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