GE's WMC Mortgage loans hit subprime index

By Al Yoon - Analysis

NEW YORK (Reuters) - General Electric Co.'s subprime mortgage unit is responsible for some of the worst-performing loans in the benchmark index for the $575 billion market for home equity asset-backed securities, showing few lenders are immune to recent U.S. housing sector problems.

Losses on more than $2.6 billion in loans issued by WMC Mortgage, a Burbank, California-based unit of GE Money Bank, are expected to top 15 percent, the highest projected rate of any bond in the widely watched ABX derivative index of bonds issued in early 2006, a UBS Securities model showed.

The ABX-HE 06-2 index of subprime mortgage securities plunged as much as a third this year as concern that bonds and companies represented don't fully reflect potential losses created by loans to the riskiest borrowers.

The drop in the ABX index itself fueled a sell-off in risky assets by investors who have been using the index as a leading indicator of sentiment in 2007.

WMC on Friday said it would lay off 460 employees, or about 20 percent of its staff, as the subprime market contracts.

"As is well known, the subprime/Alt-A industry is in a period of stress, and WMC is not immune to the factors of affecting the entire industry," said spokeswoman Brandie Young. She called the UBS report "flawed," saying it is based on a small portion of WMC loan originations.

WMC closed two branches, said Mitch Freifeld, whose Clearwater, Florida-based Branch Management Solutions broker-service company has a relationship with WMC.

The credit problems in the subprime mortgage sector has emerged in the past few months as investors wary of the rapid rise in delinquencies put loans back to the issuers at a record pace, denting profit or creating losses.

More than two dozen lenders, including California-based Fremont General Corp. and New Century Financial Corp, have curtailed or stopped lending since February as Wall Street banks severed credit lines to the companies.

"Anything tainted with the subprime brush is being hammered no matter who you are," said Mirko Mikelic, a Grand Rapids, Michigan-based fund manager at Fifth-Third Asset Management, which has $22 billion under management.

Thirty-day delinquencies rose to 9.62 percent in February, from less than 2.0 percent six months ago, on WMC's loans backing one of the 20 bonds in the ABX 06-2 index, according to Morgan Stanley, whose Morgan Stanley ABS Capital I Trust packaged the loans into home equity ABS.

GE, the second-largest company in the world by market capitalization, purchased WMC Finance Co. in 2004, when it was the sixth-biggest subprime lender.

The foray into subprime and so-called Alt-A lending, loosely defined as loans to higher credit borrowers who otherwise fall short of the strictest documentation for a prime loan, was timely as the sectors' growth has outpaced that of prime mortgages.

Subprime loans grew to 13.6 percent of the total mortgage market last year from 2.4 percent in 2000, according to the Mortgage Bankers Association.

WMC issued $21.6 billion in loans last year, making it the ninth-biggest issuer, according to trade publication Inside B&C Lending. In 2003, WMC reportedly originated $8.2 billion.