Lehman Downgrades Finance Companies


Countrywide Financial, Washington Mutual and several other finance companies were downgraded on Monday by Lehman Brothers analyst Bruce Harting, who said the U.S. credit downturn could result in $242 billion of mortgage-related losses.

Harting downgraded the mortgage finance sector to "negative" from "neutral," and the specialty finance sector to "neutral" from "positive. He cut Countrywide and IndyMac Bancorp to "underweight" from "equal weight," and Washington Mutual to "equal weight" from "overweight."

The analyst also downgraded three credit card companies -- American Express, Capital One and Discover Financial Services -- to "equal weight" from "overweight."

Harting estimated mortgage industry losses over the next several years at between $40 billion and $242 billion, including from mortgage-backed securities and financial institutions' balance sheets.

He called $174 billion the most likely scenario, assuming an estimated 6 percent decline in home prices. Under this scenario, losses could total $12 billion this year, $40 billion in 2008, $45 billion in 2009, more than $30 billion in 2010, and falling thereafter, he said.

"We cannot remember a period in recent history when financial stocks in our sectors went up in the face of rising credit losses, let alone in the early stages of rising credit losses," Harting wrote. "Only a fraction of these losses have been realized, and each quarter the numbers will likely get larger."

Hefty Losses Expected

Harting added: "We believe that the hefty expected losses in the mortgage sector cannot happen in a vacuum, and that it is just a matter of time before problems spill over to other loan sectors in consumer finance, most notably credit cards, auto and other forms of credit."

The downgrades follow announcements by Washington Mutual, Capital One and regional bank Sovereign Bancorp of rising loan losses, and warnings of weaker-than-expected results by IndyMac and mortgage insurer PMI Group .

Harting cut PMI to "underweight" from "overweight," and assigned "underweight" ratings to MGIC Investment Corp and Radian Group Inc, which also provide mortgage insurance.

The analyst cut his price targets to $12 from $20 for Countrywide, to $12 from $19.50 for IndyMac, to $30 from $45 for Washington Mutual, to $60 from $70 for American Express, to $72 from $95 for Capital One, and to $23 from $28 for Discover.

In Friday trading, shares of Countrywide closed at $15.23; IndyMac at $14.75; Washington Mutual at $29.09; American Express at $57.11; Capital One at $62.68, and Discover at $19.80.