An earnings warning from
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
, 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
( LEND) off 7%,
( NDE) dropping 4%,
( NFI) down 3.8% and
( CFC) lower by 2.7%.
M&T said late Friday that first-quarter earnings will be reduced by $11 million, or 10 cents a share, because "unfavorable market conditions and a lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter." M&T originates Alt-A residential mortgage loans and then sells them in the secondary market.
M&T said that at a recent auction of such loans, fewer bids than normal were received and the pricing of those bids was lower than expected.
The bank reduced the carrying value of its Alt-A portfolio that had been held for sale by $12 million in the first quarter. It also transferred $883 million of Alt-A loans that were previously held for sale into its held-for-investment mortgage portfolio.
M&T says the demand for it to repurchase previously sold Alt-A loans is increasing. As a result in the first quarter, M&T accrued $6 million to provide for declines in market value of previously sold loans that are expected to be repurchased. Buyers of mortgage securities often retain the right to sell loans back to the issuer if a certain percentage of loans is delinquent or in default at a certain date. These so-called repurchase demands played a role in the demise of New Century, which found itself facing massive repurchase obligations with little cash on hand.
M&T also expects its net interest margin -- a way of measuring a bank's ability to generate income from its deposit and investment businesses -- to be in the range of 3.60% to 3.65%, down from 3.73% from the fourth quarter.
Jennifer Thompson, an analyst at Oppenheimer, cut her rating on the bank to sell from neutral. Thompson says the substantially lower first-quarter guidance implies other pressures are hurting M&T besides the difficult mortgage environment.
"Mortgage market related pressures are the headline grabbers, but the EPS impact of about 10 cents accounts for just 26% to 36% of the difference between management's
first-quarter '07 guidance range and
fourth-quarter '06 results," Thompson writes in a note. A "greater than anticipated net interest margin pressure is a bigger long term concern in our opinion (as the write down and accrual should be one time barring further market deterioration)."
That being said, "lower demand for Alt-A product on the heels of troubles affecting subprime should impact valuations and potential gain on sale income at the larger mortgage players with Alt-A exposure," she writes.
Alt-A loans include option adjustable-rate mortgages, negative amortization loans and other nontraditional loans. Bears on the mortgage stocks say these loans are troubling because they often include provisions that sharply increase borrowers' payments after a set period -- increasing the risk of default.