Tuesday, August 21, 2007

Capital One and Thornburg lose $1.8bn

Capital One and Thornburg lose $1.8bn
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: August 20 2007 23:15 | Last updated: August 20 2007 23:15


The US mortgage meltdown continued to spread on Monday as two big lenders announced expected losses of a combined $1.8bn.

Capital One Financial, one of the largest US credit card providers, said it would close its wholesale home lending unit, GreenPoint Mortgage, and take an after-tax charge of $860m, most of it coming this year.

Capital One said it would reduce its 2007 earnings guidance by $2.15 to $5.00 per share and would eliminate 1,900 jobs.

Meanwhile, Thornburg Mortgage, which provides big mortgages on expensive properties, said it would record a $930m third quarter loss on the sale of mortgage-backed bonds.

In an internal memo, Rich Fairbank, Capital One chief executive, said the company’s decision to close GreenPoint came in response to “unprecedented disruption in the secondary mortgage markets”.

GreenPoint specialised in providing loans to subprime borrowers and so-called “Alt-A”, or near prime borrowers. GreenPoint would then sell those mortgages on to investors.

However, defaults among subprime borrowers have soared in recent months and the appetite among investors for securities backed by mortgages has plunged.

”The reductions in demand and pricing in the secondary mortgage markets make it difficult to operate our wholesale mortgage banking business profitably,” said Gary Perlin, Capital One’s chief financial officer, in a statement.

He added, ”Beyond that, Capital One’s other businesses are supported by ample liquidity and funding including deep access to deposits, a ‘stockpile’ of subordinated credit card funding in place that allows approximately $9bn of AAA credit card funding going forward, and a $25bn portfolio of highly liquid securities.”

Capital One, based in McLean, Virginia, acquired GreenPoint as part of its 2006 purchase of North Fork, the New York bank. GreenPoint was known to offer “no doc” mortgages that provided credit even if borrowers did not provide documentation of their ability to pay.

The move by Capital One and the announcement from Thornburg come after Countrywide, the largest US mortgage lender, last week said it would tap into an $11.5bn credit line to fund operations after the global credit squeeze curtailed its ability to raise funds in the debt market.

But on Monday Countrywide, which employs more than 61,500 across the US, took out full page advertisements in the New York Times and other newspapers saying it was “well capitalised”. These came after some reports suggested the lender had begun to lay workers off.

Partly in response to Countrywide, the US Federal Reserve said it was cutting in half the interest rate penalty on its discount window, allowing banks to borrow directly from the Fed against a wide range of collateral, including most mortgages, at only 50 basis points above the federal funds rate.

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