Swiss banks caught in US mortgage slump

The US mortgage market has taken a battering Keystone

Switzerland's largest banks are scrabbling to reclaim billions of francs owed to them by a troubled United States mortgage lender following an industry slump.

UBS and Credit Suisse are demanding repayments of $1.5 billion (SFr1.81 billion) and $1.4 billion respectively from New Century Finance. However, analysts are not linking this development with a recent fall in share prices.

California-based New Century Finance announced last week that it has stopped issuing new mortgages and has suspended share trading. The firm is also being investigated by the US authorities for alleged accounting errors and fraud, and it was forced to admit on Tuesday that creditors are turning off the tap.

The company is the second largest issuer of loans in the US sub-prime mortgage market, lending to people with bad credit ratings or who cannot prove their incomes.

The risky sector has been severely hit by a downturn in the US economy coupled with rising interest rates, resulting in a high number of loan repayment defaults.

UBS and Credit Suisse are among a number of creditors that are pulling the plug on outstanding loans with New Century Finance, reported to total $8.4 billion (SFr10.14 billion).

They allege, amongst other things, that New Century Finance defaulted on the terms of the loans and cite an adverse change in the condition of the company as reasons for claiming the money back early.

New Century Finance is reported to have just $60 million (SFr72.4 million) in cash reserves, but both Swiss banks stressed that they did not expect to incur losses as the loans are secured by mortgages and the property behind them.

Share price plunge

The sorry state of the US real estate market is causing concern around the world’s financial markets as it is a leading indicator of the underlying state of the US economy as a whole.

Late or missed payments on mortgages increased to 4.95%, rising to 13.3% in the sub-prime market in the last three months of 2006, according to the Mortgage Bankers Association that represents the US real estate finance industry.

And lenders launched repossession actions against more than one in every 200 mortgage borrowers in the period. Both figures are the worst since records began 37 years ago.

Shares in UBS and Credit Suisse took a tumble this week, sinking 3.8 per cent and 4.3 per cent on Wednesday alone.

However, Julius Bär analyst Madeleine Hofmann puts the share price plunge down to general market volatility.

“The sub-prime losses would be minimal as a fairly big part of the loans will have been secured and any losses would be a one-time event. This reflects a more general concern about the US economy,” she told swissinfo.

“The main focus of attention is on the sterile US consumer sentiment which is extremely important for the whole US economy.

“These banks have enjoyed terrifically strong markets in the last three or four years and there is now a concern about a general risk aversion that could have a negative effect on assets, and that could hurt business.”

swissinfo, Matthew Allen

Key facts

There were a record 74.4 million home owners in the US in 2004.
According to the US Mortgage Bankers Association, 13.5% of all mortgages in the country last year were in the sub-prime sector. This figure compares to 2.6% in 2000.
Sub-prime mortgages accounted for some 20%, or $600 billion (SFr724 billion), of all loans ($31 trillion or SFr34.7 trillion) in terms of money volumes in the US in 2006.

In brief

Shares in New Century Finance dropped 36% last month when the firm announced problems with repayments and write-offs.

The company’s shares took a further 69% hit early this month on news that the federal authorities were pursuing a criminal investigation into its activities.

On March 8, the firm said it was issuing no new loans. On Tuesday it was forced to announce that creditors have cut off credit or were intending to do so, leading to speculation that it might go bust.

Last year, US sub-prime lenders Ownit Mortgage Solutions and Mortgage Lenders Network both filed for bankruptcy, followed by ResMae Mortgage Corporation in February this year.

In addition, Accredited Home Lenders Holding and HSBC Finance, also in the same field, have run into problems.