How the US’s largest mortgage lender lost more than $1 trillion to subprime borrowers in a single year
Posted September 16, 2018 06:00:10US mortgage lender Ally Financial is currently losing money on subprime mortgages, and it’s not because the subprime market is in trouble.
Instead, Ally is doing it because of a massive oversupply of mortgages and the lack of liquidity, according to data compiled by financial consulting firm Wealthfront.
“A major reason why Ally is losing money is that the U.S. housing market is at an all-time low, and the market is not going to recover until the U:H2 [United States housing market index] has risen to a level that is sustainable,” explained Scott Drexler, the chief investment officer of Wealthfront, in a blog post.
In addition, Ally’s mortgage originations are at an historic low, due to the fact that subprime loans are still underwriting and sold to investors, Drexlers analysis found.
“As a result, Ally will be underwriting low-risk, high-value mortgages that investors are willing to pay for, which means the losses are far less severe,” he wrote.
Ally’s losses come at a particularly bad time for the U-Haul business.
Ally lost $3.9 billion last quarter.
It had $8.5 billion in losses on its loans, and was in the process of refinancing its portfolio of $50 billion of subprime mortgage debt.
Ally is the fifth-largest U.
Haul in terms of loan volume, and its losses are likely to be more than double what it lost last quarter, according a report from TheStreet Ratings Team.
“There’s an entire industry out there that’s going to be hurt,” said Drexlinger, pointing to a number of factors.
For starters, Ally was already in trouble with its loan originations, and now it has no choice but to restructure or sell its mortgage portfolios.
In the last three months, Ally has reported losses of $2.7 billion, which is the worst quarterly loss since it went public in January 2017.
“The market is basically at an equilibrium, which isn’t good for Ally,” Drexl said.
“It’s not going away, and they need to find a way to get it back on track.”
As a result of the financial crisis, Ally lost almost $2 trillion in mortgage debt, which equates to more than half of its overall loan portfolio.
But the mortgage origination problem isn’t going away anytime soon.
“In the next five years, the UHaul market is going to become a much smaller, less stable market than it was in 2016, which makes it even more difficult for Ally to get its house in order,” said Robert Siegel, a managing partner at Siegel & Jones in Chicago.
“But if Ally can find some sort of solution, then the risk to Ally’s business is very low.”
Ally is not the only company struggling to find solutions.
A number of smaller lenders are also struggling to keep pace with the market.
Home Equity Group, which owns Fannie Mae and Freddie Mac, is already in debt and is expected to be insolvent by 2021, according the Wall Street Journal.
“Home Equity is on track to go bankrupt in 2021, and there is a lot of talk about how to help the financial sector in general,” said Andrew Wexler, an analyst with Capital IQ.
“However, the only thing that’s actually likely to help Ally is getting its mortgage origencies under control, and that’s the easiest way to do that, by reducing the risk of sub-prime mortgages,” he said.