Mortgage & Housing Still a Financial Albatross
As we start to see another earnings season for financial institutions through the rear-view, we felt it was time to sit down with Zacks senior finance industry analyst
Neena Mishra for her take on how first quarter earnings season performed overall, and where she sees financials going from here.
Obviously, finance companies highly exposed to the mortgage crisis are suffering, but financials overall aren't doing so badly thus far in 2008. What do you make of this?
That's right. The companies which have high exposure to mortgage/housing and commercial real estate (residential development, in particular) loans reported their 1Q08 results far worse than the estimates. To name a few under our coverage, Countrywide Financial (CFC), National City Corp. (NCC), Comerica (CMA) and Zions Bancorp (ZION) have suffered badly from the credit related losses. The mortgage insurer PMI Group (PMI) also reported losses which were substantially worse than the estimates, due to increased losses in the U.S. Mortgage Insurance Operations and the impairment of PMI's investment in FGIC.
On the other hand, some other banks like Westamerica Bancorporation (WABC), Wilmington Trust (WL) and BB&T (BBT), that have relatively lower proportion of housing related loans in their portfolio and/or derive a significant share of their revenue from fee based businesses, reported their earnings which were in-line with or slightly ahead of our estimates. We also saw some of these companies benefitting from the Fed's actions as their net interest margins expanded due to the lower rates on their borrowings.
One of the companies you cover is Freddie Mac. Where do you think this company is, currently, in this mortgage-lending downcycle?
Freddie Mac's (FRE) first quarter results were better than expected, mainly aided by the accounting changes. The company also announced a capital raise of $5.5 billion and we suspect that they will need to raise more capital in the coming quarters. Moody's recently downgraded FRE's financial strength rating and placed them on a negative outlook.
