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$5.6 Billion Subprime Charges Announced


$5.6 Billion Subprime Charges Announced

Recent mergers, acquisitions and corporate activity

October 5, 2007


photo of Coco Salazar
Three companies disclosed today subprime-related charges totaling more than $5.6 billion. But despite the massive charges, one billionaire investor successfully bid on the operations of a bankrupt nonprime lender.

But first, Fitch Ratings announced it downgraded the short-term Issuer Default Rating of Popular Inc. to F2 and placed other debt on review for possible downgrade. Continued concerns about earnings, asset quality pressure and the parent company’s liquidity were cited. While the Popular’s U.S. subprime mortgage exposure still appears manageable overall, stress in that mortgage sector will likely result in sizable additional charges.

Fitch also downgraded First Horizon National Corp.’s debt ratings in light of declining profitability. The agency also downgraded the debt ratings of affiliated companies.

The Federal Deposit Insurance Corp. said Thursday that Miami Valley Bank of Lakeview, Ohio, has failed and its deposits will be taken over by Citizens Banking Co. As of Monday, Miami Valley had $86.7 million in total assets and $76 million in total deposits, $14 million over the federal deposit insurance limit. Citizens will assume the $62 million in insured deposits for a two percent premium.

Ohio’s Superintendent of Financial Institutions closed Miami Valley yesterday, but the bank’s two offices were scheduled to reopen today as branches of Citizens, the FDIC said.

Merrill Lynch today warned it expects a third quarter net loss, of up to 50 cents per diluted share, primarily due to an estimated $4.5 billion in write-downs on collateralized debt obligations and subprime mortgages. The negative valuation adjustments partly reflect significant dislocations in the highest-rated tranches of these securities caused by unprecedented credit spread movements and an intensified lack of market liquidity for these asset classes during the quarter.

However, the New York-based company noted it significantly reduced its overall exposure to CDOs and subprime mortgages, and that it is “beginning to see signs of a return to more normal activity levels in a number of markets” while continuing to see strong long-term growth trends in each of its global businesses.

Following Merrill’s announcement, Fitch announced it revised the rating outlook for the company and its subsidiaries to Negative from Stable.

Citing a weakening housing market and disruptions in the secondary market, Washington Mutual Inc. said its net income will likely be a whopping 75 percent lower than the third quarter 2006. Of approximately $1.4 billion in expected losses, about $975 million will be a loan loss provision primarily reflecting the weakening credit quality of subprime mortgages and home equity loans. That reserve is about $550 million more than the amount of loans it expects to charge off as unrecoverable. The other $4 million or so in losses will result from write-downs in held-for-sale mortgage loans, trading securities portfolio and investment grade mortgage-backed securities.

WaMu noted it looks forward to “an improved fourth quarter as we continue to see good operating performance in our Retail Banking, Card Services and Commercial Group businesses.”

Sovereign Bancorp Inc. said today it will increase its third quarter provision for credit losses to between $155 million and $165 million pre-tax. The Philadelphia-based company had previously estimated the charge at between $104 and $114 million.

The charges are related to poor performance on an $0.5 billion residual nonprime home equity portfolio remaining after its exit from correspondent home equity lending early last year. The company announced in December 2006 it would exit wholesale lending.

WL Ross & Co. LLC, through AH Mortgage Acquisition Co., won an approximately $500 million “stalking horse” bid to acquire American Home Investment Corp.’s mortgage servicing platform and mortgage servicing rights, the bankrupt company announced today. The sale, still subject to bankruptcy court approval, is expected to close this month.

The Irving, Texas-based operation services over 200,000 loans for more than $50 billion, the statement said. In excess of 400 people are employed by the unit.

Ross, a billionaire who specializes in turnarounds of distressed businesses, told last month that he feels that now is the time to start his planned entry into the mortgage business with the acquisition of a servicing business.

Ft. Wayne, Ind.-based Freedom Financial Holding Company Inc. announced this week an agreement to acquire in a deal expected to close by next month. The mortgage broker hopes to improve efficiency and reduce costs with its acquisition of the mortgage technology provider.

Freedom, which has filed for a public offering, said its focus is to acquire residential originators in key U.S. markets.

Coco Salazar is an associate editor and staff writer for

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