High-yield/macroeconomics (fka YIELD)

[rfj1862]

E*Trade Warns of Mortgage Fallout

Via DD on Biotech Values

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[The company, which many people didn’t know was even in the mortgage business, plans to take $345M in write-offs for bad loans and impaired mortgage-backed securities. Imagine how many $7.99 commissions it will take to recoup the $345M!]

http://online.wsj.com/article/SB119006126061630102.html

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By SUSANNE CRAIG
September 17, 2007 5:15 p.m.

E*Trade Financial Corp., best known for providing cheap trades to individual investors, this afternoon warned investors that it has been badly stung by the recent fallout in the mortgage market.

The company says it expects profits to come in 31% below the most recent guidance it had given analysts -- partly due to its exposure to the mortgage business.

The news, weeks ahead of its scheduled third-quarter earnings report, provided Wall Street with a glimpse of what may be in store tomorrow when the country's biggest brokerages, beginning with Lehman Brothers Holdings Inc., start reporting third quarter earnings. After years of blowout profits, traders are bracing for a rough quarter as firms like Lehman grapple with the effects rising mortgage defaults have had on their business. Wall Street firms, including E*Trade, have many tentacles in this business.

For E*Trade, which is scheduled to release earnings in mid-October, the pain is significant. It warned it will earn approximately $1.10 a share this year, down about 31% from the $1.60 or so it was forecasting.

"We want to get this issue behind us and put the focus solely back on our core retail customer," E*Trade Chief Executive Officer Mitch Caplan said in an interview. He stressed that despite the recent issues, the company does not have a liquidity problem and released detailed information about its current financial picture along with today's announcement.

While most people associate E*Trade with online trading, the mortgage business was a big driver of E*Trade's earnings growth over the past few years. E*Trade, a buyer of mortgages from third parties, plans to get out of that business altogether and has set aside $245 million, up from $70 million, to cover related losses over the next four quarters. This provision will cover both losses on mortgages the company has made and bought from third parties as well as home-equity lines, a trouble spot for E*Trade. The firm says that as of the end of August, 2% of its $17-billion mortgage portfolio was comprised of delinquent loans while 2.8% of its $12.6 billion home equity portfolio is at increased risk.

In addition, the firm says that it may need to take a charge of up to $100 million to cover losses in its $18 billion-plus securities portfolio, which includes assets backed by mortgages that are now worth less than they were a few months ago.

As part of the sweeping package of financial charges announced this afternoon, the firm said it plans to spend more time focusing on its retail customer base and will restructure its balance sheet so it is more reliant on cash and assets it generates from customers on everything from margin loans to E*Trade originated home loans. Specifically, it hopes that as much as 85% of its balance sheet will be driven by customer related activity, up from about 60% today. As a result, E*Trade said investors should expect to see $18 million less in earnings over the next four quarters.

It will cost E*Trade $32 million in expenses just to exit that one mortgage business and overhaul another unrelated business that provides services to big or institutional clients.

The news could also cast a cloud over the merger discussions it was having with rival TD Ameritrade Holding Corp. The two sides had been recently been discussing whether to merge operations, according to people familiar with the matter. Yesterday's announcement will no doubt raise short-term concerns Ameritrade executives have expressed concern about E*Trade's reliance on the mortgage business.
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