March 10, 2007 / 3:30 AM / 13 years ago

GE's WMC Mortgage loans hit subprime index

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.

WMC loans in Morgan Stanley’s MSAC 2006-WMC2 bond carry characteristics of subprime issues that analysts have blamed for surging delinquencies.

More than half the loans have “stated” income documentation that don’t require borrowers to prove their ability to repay the loan, data on Morgan Stanley’s Web site showed.

First and second lien loans together cover more than 90 percent of the homes’ values, making them riskier to investors since the homeowners have little equity at stake. Most lenders have been paring back on such loans, especially those with “piggyback” second mortgages that help finance 100 percent of the home.

WMC on Friday said it stopped making 100 percent loan-to-value mortgages, mirroring a move by Washington Mutual Inc.’s Long Beach Mortgage subprime unit on Thursday, Freifeld said.

“The second-lien market and other highly levered loans are certainly history in the near term for less credit-worthy borrowers,” New York-based Deutsche Bank AG analysts said in a note to clients this week.

WMC has “realigned our resources to be more consistent with today’s market,” WMC’s Young said. The company is not currently up for sale, unlike others such as Fremont, she said in an interview earlier this week.

Volatility in the ABX indexes administered by London-based Markit Group Ltd. has mesmerized financial markets as losses at subprime lenders became better known through fourth quarter earnings reports or failures to produce profit reports.

The “ABX-HE 06-2 BBB-“ index that includes the MSAC issue fell sharply in December and the slide did not stop until investors saw “fair value” last week.

The projected losses on the MSAC deal are more than three percentage points above the 11.97 percent rate on Lehman Brothers Holdings Inc.’s SAIL 2006-4 bond, and more than five times the 2.8 percent rate seen for Barclays Plc’s SABR 2006-OP1 issue, according to the UBS model.

Analysts stress that the quality of bonds varies greatly from deal to deal, depending on loan attributes and the level of protection built in by bond underwriters.

Bonds sold by WMC’s bond unit are seen among the safer ones in one struggling sector. Credit default swap spreads on “Baa3” rated WMC deals from 2006 this week widened 58 percent to 795 basis points in the past month, compared with a 122 percent increase for Fremont’s issues to 1,245 basis points, Deutsche Bank data shows.

In 2006, GE Money represented 13.3 percent of the conglomerate’s overall $163.39 billion in revenue and 13.3 percent of its $26.33 billion in segment profit.

But GE share prices have been relatively insulated from the fallout of other lenders that have issued disappointing earnings or failed.

GE stock this year has declined 7.0 percent amid concerns that the slowing U.S. economy would hurt earnings at the conglomerate.

Shares of Fremont and Countrywide Financial Corp., the largest U.S. mortgage lender, dove 52 percent and 15 percent, respectively.

Additional reporting by Scott Malone in Boston and Chris Reiter in New York

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