The mortgage crisis has barely begun

It’s been months since the public at large first learned that the state of residential mortgages was far from healthy, and still we don’t have a clear answer to one very important question: how much are the mortgages issued in the past five years really worth? For the longest time those dealing in mortgages were simply allowed to value them however they liked, yielding totally baseless figures. But now some companies are being forced to sell them on the open market, and it turns out the market has a very different opinion of what those mortgages are worth (emphasis added):

E*Trade Financial Corp’s (ETFC.O: Quote, Profile, Research) firesale of mortgage-backed securities has conjured up a new worst-case scenario for Wall Street’s portfolio of subprime assets by knocking their value even lower.

Financial analysts on Friday said E*Trade got anywhere from 11 cents to 27 cents on the dollar for its $3.1 billion portfolio of asset-backed securities. The portfolio sale was part of a $2.5 billion capital infusion from a group led by hedge fund Citadel investment Group.

“The portfolio sale, one of the few observable trades of such assets, has very clear, generally negative, implications for the valuation of like assets on brokers’ balance sheets,” Credit Suisse analyst Susan Roth Katzke said.

The portfolios are hard to value because demand has dried up for them and the brokerages sometimes use their own models to put a value on the assets. Any rare actual transaction could have an effect on other brokerages’ valuations. […]

Goldman Sachs analysts said they were surprised by the size of the discount on the E*Trade portfolio because 73 percent of the assets were backed by prime mortgages, or loans to people with solid credit. […]

Citigroup investment bank analyst Prashant Bhatia said E*Trade actually received 11 cents on the dollar for its portfolio, if you factor in that the brokerage received $800 million in cash minus 85 million shares it issued. He said that implies Citadel’s received stock compensation worth about $450 million, leaving E*Trade with only $350 million for its $3.1 billion portfolio.

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