What is Centum and do you really think Canada will not be impacted by this current news?
SAN FRANCISCO (MarketWatch) -- Investment bank Goldman Sachs is increasingly concerned about the health of California's real estate market and reckons mortgage giant Countrywide Financial could be harder hit than other lenders because of its big exposure to the state.
Countrywide shares slipped 2.5% to $37.28 on Friday, leaving them down more than 11% so far this year.
Mortgage delinquencies jumped 46% in California last year, vs. a 5% increase nationally, Goldman said in a note to clients late Thursday.
Delinquencies on prime and subprime adjustable-rate mortgages in California soared by 78% and 60% respectively, vs. 33% and 24% across the U.S., the bank added, citing recent data from the Mortgage Bankers Association.
Median California home prices are still creeping up, and the state's strong employment trends should support the real estate market. But Goldman is worried that surging prices in the state in recent years weren't driven by traditional factors such as strong employment and income growth. Instead, the bank reckons an increase in ARM mortgages offered to borrowers who were already stretching to buy high-priced homes fueled the boom.
Now that lenders are cutting back some of these types of loans and regulators are beginning to crack down, California home prices could begin falling later this year, especially in high-price cities and towns, Goldman said.
"Many metros in California have home prices that are not justified by the underlying fundamentals," Goldman analysts James Fotheringham, Daniel Zimmerman and Monica Gabel, wrote in their note to investors. "Instead house price trends have been driven by the availability of subprime and non-traditional credit."
Originations of subprime mortgages, which are offered to poorer borrowers with blemished credit records, could drop 30% to 50% in 2007 and this contraction in the availability of credit will hit California's real estate market harder than elsewhere, the analysts said.
Ten of the top 12 metropolitan areas for subprime mortgages last year were in California, with Stockton topping the list. More than 40% of home loans in that town, nestled in the state's central valley east of San Francisco, were subprime in 2006, the analysts noted.
With fewer subprime loans available and more delinquencies likely, California home prices will probably weaken further in 2007, the analysts said.
That's not good news for Countrywide (CFC : Countrywide Financial Corp
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6:45pm 04/23/2007
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CFC36.25, -1.11, -3.0%) . Almost half of the company's $71.8 billion mortgage portfolio and more than a quarter of its home loan servicing business is from California, the Goldman analysts noted.
Countrywide has also offered a lot of option ARMs. These types of mortgages let borrowers pay less than the interest they owe on the loan each month, for a certain period of time. If borrowers chose this option, the size of their loan grows and when they finally have to start paying off the principal, the monthly payments can increase a lot.
Mortgages offered to prime borrowers (people with high credit scores and less debt) haven't experienced large increases in delinquencies. But option ARMs are one of the few types of "prime" home loans that have begun to deteriorate, Goldman said.
About 46% of the principal from Countrywide's mortgage portfolio is from option ARMs, and many of these loans were probably originated in California, Goldman noted, adding that this is a "risky combination."
Countrywide will likely have to set aside more money to cover loan losses and that will cut into profits, the analysts said. They cut their earnings forecasts for the lender by 3% in 2007 and 2008 and by 4% in 2009.
The analysts also reduced their price target to $32 from $33 and reiterated their sell recommendation.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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