M&T Bank Corp. did a lot more than just warn shareholders that problems with a type of risky mortgage would cut its first-quarter profits by $7 million.
It dropped a billion-dollar bombshell on them.
Or, to be more precise, $1.1 billion. That's how much less all of M&T's stock is worth today than it was at the end of last week after its shares tumbled by 8 percent, dropping from $115.83 on March 30 to $105.99 on Friday.
It was a huge hit for a Buffalo-based bank that generally has a reputation for being pretty conservative when it comes to making loans. And it got analysts worrying whether M&T's bad news was a harbinger of trouble ahead for other banks and a sign that the ongoing mortgage crisis may not just be limited to the lowest-quality loans.
M&T "is among the first banks to report that recent issues in the subprime arena have, in fact, spread upward to 'higher-quality' borrowers," said Joseph Fenech, an analyst at Sandler O'Neill & Partners in a report.
At issue is a relatively small part of,8l,7p4 M&T's mortgage business involving loans that are known as Alt-A mortgages. These are generally viewed as less risky than so-called "subprime" loans because they are frequently made to creditworthy borrowers, including many self-employed people, who only provide limited documentation of their incomes and assets.
"It's like subprime-lite," says Anthony J. Ogorek, who runs Ogorek Wealth Management, a Williamsville money management firm.
Critics of these stated income mortgages sometimes call them "liar loans," and they don't meet the standards for lenders to sell them to Fannie Mae or Freddie Mac. Consequently, lenders like M&T typically sell the loans to other investors on the secondary market, but the turmoil over subprime loans also caused the secondary market for Alt-A mortgages to dry up.
When M&T tried to auction off $883 million in Alt-A loans, it couldn't find bidders willing to pay an acceptable price, forcing the bank to write down the value of those mortgages by $12 million. It also will take a $6 million loss on loans that it already sold because the investors are invoking a guarantee requiring M&T to buy the loans back if the borrower doesn't pay on time during the first 90 days after the sale.
"We have little doubt that if this top-quality bank is having difficulties in its Alt-A business, it is an industrywide problem," said Morningstar Inc. analyst Jaime Peters in a report. "Consequently, we expect to see more announcements and warnings from M&T's peers."
That's because lenders recently have been offering Alt-A loans to a broader array of less creditworthy home buyers through more exotic -- and risky -- products, such as interest-only mortgages and option adjustable-rate mortgages, where the monthly payments may not even cover the interest owed.
As a result, Alt-A mortgages accounted for 13.4 percent of all home loans made last year, compared with just 2.1 percent in 2003, according to Inside Mortgage Finance, a trade journal.
Now, with home prices slipping and interest rates rising, borrowers having trouble making payments can't solve their problems by refinancing or selling their house, as they could when the housing boom was in full swing.
M&T said it isn't abandoning the Alt-A market, but is tightening its lending standards. "We have acted quickly to make the operational changes necessary to mitigate future risk," Robert G. Wilmers, M&T's chairman and CEO.
But it wasn't quick enough to stop M&T's shareholders from taking a billion-dollar bath.
"We're not confident the first warning will be the only warning regarding Alt-A loans," said bond analyst Kathleen Shanley at research firm Gimme Credit.