Lehman Unwinds Prime, Alt-A Mortgage Positions

After pre-announcing earnings last week, Lehman Brothers Holdings Inc. (LEH) said Monday that it unwound billions in prime and Alt-A mortgage positions between the end of February and June, the latest effort by Wall Street to get ahead of what many expect to be the next shoe to drop in the troubled U.S. mortgage market. Lehman reported a net loss of $2.8 billion for the second quarter, or ($5.14) per share, well within expectations set by last week’s announcement, as it absorbed $2.4 billion in mark-to-market activity in its residential mortgage-related positions. The firm reduced its residential mortgage exposure from $31.8 billion to $24.9 billion during the quarter; a review of financial data provided by Lehman by Housing Wire shows that the majority of that drop was the result of selling positions in prime and Alt-A mortgages off of its books. Shrinking U.S. presence While the majority of Lehman’s residential mortgage exposure remains centered in the United States, the company clearly trimmed its exposure nationally during the quarter. Of remaining mortgage exposure, less than 58 percent is now U.S.-based; more than 65 percent of Lehman’s mortgage book was centered in the United States just three months ago. Lehman actually increased its holdings of European residential mortgage securities — primarily covered bonds — during the quarter, underscoring the lack of confidence that now exists around U.S. mortgages. Prime and Alt-A exposure represented by far the largest dollar decreases, as Lehman sold off $4.4 billion in U.S. Alt-A/prime mortgage assets during its second quarter. $1.6 billion came in the form of whole loans, while $2.5 billion were in AAA-rated RMBS tied to Alt-A and prime mortgages. Lehman does not break out Alt-A seperately from prime mortgages in its financial data.

Richard Fuld

Lehman CEO Richard Fuld has faced criticism for the Wall Street firm’s recent losses,
but has aggressively scaled back the company’s exposure to U.S. mortgages.
(photo:World Economic Forum)

News that Lehman was looking to reduce its exposure among prime mortgages is telling. Housing Wire was among the first note in early June that credit troubles once centered in subprime mortgage performance were moving into prime and Alt-A mortgages; a recent report by the Mortgage Bankers Association found that the pace of borrower distress was significantly greater for prime borrowers across all loan types than for any loan type associated with a subprime borrower. “We have begun to take the necessary steps to restore the credibility of our great franchise and ensure that this quarter’s unacceptable performance is not repeated,” said CEO Richard Fuld in a press statement. Part of that strategy is clearly to lessen a reliance on U.S. mortgage performance, while attempting to get ahead of further expected weaknesses in both prime and Alt-A mortgages. Disclosure: The author held no positions in LEH when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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