Mortgage industry fallout not over

From BusinessWeek:

Mortgage Mess Gets Messier

Sometimes bad news comes in threes.

While the Federal Reserve cut interest rates Dec. 11 to ease the financial and housing crises, the market was confronted with yet more evidence of the damage these crises are inflicting on the mortgage industry. Washington Mutual (WM), H&R Block (HRB) and IndyMac Bancorp (IMB) all took hits as more and more borrowers seem unable to pay their mortgages.

Washington Mutual kicked off the latest round after the market close on Dec. 10 by announcing that given the losses on loans, it needs to cut costs, including 3,150 jobs, raise an extra $2.5 billion in capital, and cut its generous dividend to shareholders.
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The big questions for WaMu and other mortgage players is when will the loan losses slow and mortgage businesses start to pick up again. One sign of trouble: home prices are expected to keep falling in 2008. Another concern is a drop in mortgage originations; WaMu expects originations for the entire industry to fall from $2.4 trillion in 2007 to $1.5 trillion next year.
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Then H&R Block chimed in by reporting a loss in its second quarter of $1.55 per share, vs. a 49-cents loss a year ago. Most of that loss was due to H&R Block’s closed-down subprime mortgage business. It tried to sell its Option One Mortgage Corporation to Cerberus Capital Management in April, but that deal fell through earlier this month.

“We continue to move resolutely to end our participation in the subprime mortgage business,” H&R Block chairman Richard Breeden said in a statement. It has sold $3 billion in loans since August. “While we incurred a painful loss in exiting these positions, we determined to take our lumps and move forward,” he added.
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The third loser of the day was IndyMac, the nation’s ninth largest originator of mortgages that has been hurt both by the housing market slowdown and rising losses on riskier mortgages. On Dec. 11, Standard & Poor’s Ratings Service lowered its ratings on IndyMac’s debt to junk status, from BBB-/A-3 to BB+/B. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Cos. (MHP).)

The move was made because of “concerns about IndyMac’s exposure to deteriorating housing markets and the effect credit losses will have on capital levels,” S&P credit analyst Robert B. Hoban Jr. said in a statement.
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S&P said capital at IndyMac is “adequate, but further losses could make capital a primary concern.” It noted IndyMac is seeing “higher than normal” deterioration on its core “Alt-A” loans, which are mortgages issued with little or no documentation. IndyMac shares fell 9.7% to $7.61.

If Friedman Billings Ramsey’s Miller is right, expect more fallout for the mortgage industry, with the gloomy headlines stretching into 2008 and even 2009.