Alt-A Tramples M&T

An earnings warning from M&T Bank(MTB Quote) cast a new pall over the troubled mortgage industry.

The Buffalo, N.Y., bank's comments, together with a Chapter 11 filing from subprime lender New Century (NEWC Quote), hammered the home-lending sector in trading Monday.

M&T warned late Friday that earnings would be hit by "unfavorable market conditions" in its so-called Alt-A mortgage business. The company reduced earnings guidance for the first quarter to between $1.50 and $1.60 a share. Analysts were originally expecting the company to earn around $1.86 a share.

"We were just surprised that an M&T came out and said this is an area of weakness," says Tim Ghriskey of Solaris Asset Management. "We really didn't think it was going to spread beyond" the subprime lenders.

M&T's remarks made investors nervous because Wall Street has been watching for signs that rising defaults in subprime -- the business of lending to homebuyers with weak credit histories -- might spread to the ostensibly higher-quality Alt-A market. Alt-A loans are generally those made to borrowers with qualifying credit scores but without full documentation.

Ghriskey, whose firm doesn't own shares of M&T, says the news that such a large, generally stable bank as M&T issued this warning "certainly doesn't bode well" for other lenders.

Shares of M&T sank 8.5% Monday as analysts scrambled to cut earnings estimates. Other lenders sank as well, with Accredited (LEND Quote) off 7%, IndyMac (NDE Quote) dropping 4%, NovaStar (NFI Quote) down 3.8% and Countrywide (CFC Quote) lower by 2.7%.