PIMCO Says 'Alt-A' Mortgages & 'Jumbo' Loans ($417,000+) In Trouble

Discussion in 'Wall St. News' started by ByLoSellHi, Mar 17, 2007.

  1. Pimco Says Subprime Woes May Spread to Alt-A, Jumbo (Update1)

    By Mark Pittman


    March 16 (Bloomberg)
    -- Pacific Investment Management Co., the fund manager that first predicted a collapse in U.S. home prices almost two years ago, said today that losses on subprime mortgage will spread to other ``aggressively underwritten'' loans.

    Defaults could spread to borrowers with so-called ``Alt-A'' or jumbo mortgages, according to a report distributed to clients today by the mortgage group at Newport Beach, California-based Pimco, which oversees about $668 billion. Alt-A's are loans to borrowers with good credit scores who fail to meet other criteria for top- rated financing. Jumbo mortgages are loans of more than $417,000.

    ``It is likely that the poor performance we have seen in subprime loans will carry over to some degree into the most aggressively underwritten loans in the Alt-A and possibly Jumbo prime markets,'' Pimco said in the report. ``We do not believe that prime loans will be materially affected.''

    U.S. subprime borrowers fell behind on their mortgages at the highest rate in four years in the fourth quarter of 2006 and foreclosures begun on all home loans rose to an all-time high, the Mortgage Bankers Association said this week. Overdue payments on all types of loans rose to 4.95 percent from 4.67 percent the third quarter of 2006, which was a three-year high.

    Alt-A represents $1.14 trillion in loans or 12 percent of all mortgages, Bear Stearns Cos. said in a presentation last week. Subprime comprises 15.2 percent, or $1.45 trillion and jumbo mortgages are $1.41 trillion, or 14.8 percent.

    Greenspan Agrees

    Pimco's comments dovetail with those of former Federal Reserve Chairman Alan Greenspan, who said this week he expects fallout from rising subprime mortgage defaults to spread to other parts of the economy, especially if home prices decline. Pimco said today that the housing price decline may reduce gross domestic product, the value of all U.S. goods and services, by 1 percent this year.

    More than 30 subprime lenders have closed in the U.S. since late 2006, according to the report from a team led by Pimco analyst Scott Simon. Simon did not return a telephone message. Pimco is a unit of Munich-based insurer Allianz AG.

    Alt-A loans make up about 20 percent of mortgages issued last year, according to Credit Suisse. Alt-A and jumbo mortgages can't be included in bonds guaranteed by government-sponsored entities such as Fannie Mae or Freddie Mac.

    `Multiplier Effect'

    Pimco forecast U.S. median home prices will fall by 4 to 5 percent this year. The median home price for existing homes was down 8.5 percent in January from a peak of $230,000 in July, according to the National Association of Realtors.

    ``Due to the multiplier effect that a slowdown has on consumption, it is likely that the impact on the economy will be even more substantial,'' the company said in its report. ``Pimco has often compared the housing market to a supertanker -- a massive ship which takes 23 miles to come to a stop after being thrown into full reverse.''

    Home values as measured by the Office of Federal Housing Enterprise Oversight's U.S. House Price Index will drop by 1 percent, Pimco said. The last time that index, based on repeated appraisals of the same houses, fell was in December 1994.

    ``We believe that we are in the middle of a downturn, not at the end, and that the problems created by expensive housing, overstretched consumer finance and years of Fed tightening have yet to take their full toll on the U.S. housing market,'' Pimco analysts said in a report.

    The median U.S. price for a previously owned home probably will fall 2.2 percent this year to $217,200, according to a Feb. 21 forecast by David Berson, chief economist at Fannie Mae, the largest mortgage buyer. The new-home median price probably will fall 2.8 percent to $238,400, Berson said.

    Five-year Boom

    Housing and related industries account for about 23 percent of the U.S. economy, including makers of everything from copper pipes to kitchen cabinets, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

    Up until last year, the five-year boom in real estate prices had contributed as much as half the economy's growth since 2001, according to Merrill Lynch & Co. Pimco, as a firm, has been saying since July 2005 that higher rates will slow housing. Chief Investment Officer Bill Gross, manager of the world's biggest bond fund, said 11 months ago that people will eventually stop buying real estate on speculation that price increases are unsustainable.

    Gross, who predicts the Fed will cut rates to 4.25 percent this year, has raised his holdings of cash-equivalent securities to the highest level in almost two years.

    Gross isn't the only bear on housing. Executive vice president Mark Kiesel said in June that he had sold his Southern California home and moved to an apartment.