Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
Subprime Fallout by Kopin Tan
Summary: While loan defaults have seen shares of subprime lenders such as Fremont General Corp. (FMT), NovaStar Financial Inc. (NFI), Accredited Home Lenders Holding Co. (LEND) and New Century Financial Corp. (OTCPK:NEWC) tumble, Alt-A (lower than prime but better than subprime) lenders such as IndyMac Bancorp Inc. (NDE) and Downey Financial Corp. (NYSE:DSL) have been more fortunate given their limited exposure to subprime. But Banc of America analyst Robert Lacoursiere cautions that the current fallout is more that just "prime versus subprime." He doesn't think we've seen the end of the credit-tightening cycle, and says it's "increasingly likely" credit deterioration will spread from subprime to Alt-A and Option ARMs. Alt-A loans were 77% of IndyMac's 2006 origination, and option ARMs were 54% of Downey's. Countrywide Financial Corp. (CFC) carries 42% option ARMs in its portfolio, and insider sales hit a five-year peak this quarter. Conversely, government-sponsored lenders Freddie Mac (FRE) and Fannie Mae (FNM) may be sources of growth in a credit-tightening cycle because of their lack of exposure to high-risk loans. If yields rise, their "implicit government backing" may allow them to lock in wider than normal spreads.
Related Links: Wikipedia on Subprime Lending • Wikipedia on Option ARMS • Subprime Fallout Serious, But Unlikely to Derail Economy • Subprime Horror Stories: Mortgage Market Carnage, Foreclosure Hype and More