Saturday, June 30, 2007

Banks told to show subprime leniency

Banks told to show subprime leniency
By FT reporters
Copyright The Financial Times Limited 2007
Published: June 29 2007 20:45 | Last updated: June 29 2007 23:58

US regulators on Friday told banks to be more lenient with subprime mortgage borrowers in difficulties, potentially compounding uncertainties in the troubled mortgage securities market.

Such changes could affect the value of securities backed by subprime loans, which have already fallen sharply following a recent surge in defaults.

“Banks will have to work out how to reconcile the requirements of the regulators and the interests of holders of mortgage securities,” said one official.

American International Group has said implementing the guidelines will cost it at least $178m, while Washington Mutual has committed to cut rates on up to $2bn of subprime loans, some of which have been securitised.

The turmoil in the mortgage-backed securities market has brought two Bear Stearns hedge funds near to collapse, spreading wider concerns across credit markets. Richard Marin, Bear’s head of asset management, on Friday became the first high-profile casualty when he was replaced by Jeffrey Lane, a senior Lehman Brothers executive.

Several junk-rated deals coming to market were forced either to drop their most aggressively-structured elements or raise pricing.

The moves reflected investor jitters fuelled partly by subprime worries but also by rising global interest rates, expectations of heavy supply of debt for leveraged buy-outs and resistance to increasingly fashionable borrower-friendly debt structures.

Regulators have also expressed concern about rising levels of risk. A senior Bank of England official warned the vulnerability of the global financial system had increased as financial institutions have taken on greater risks in search of higher returns.

Meanwhile, investors are still struggling to evaluate the potential scale of subprime exposure in financial markets after the losses at Bear’s two funds and at others, including a listed fund run by London-based Cheyne Capital.

Much of the exposure to the subprime sector is through opaque and complex instruments known as collateralised debt obligations, which repackage tranches of debt of varying risk.

Morgan Stanley estimates the total volume of CDOs issued since the start of 2005 with some subprime mortgage exposure is about $550bn.

Reporting by Richard Beales, Joanna Chung, Saskia Scholtes and David Wighton


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