Capital Alliance Income Trust Ltd., a residential mortgage REIT, said Friday that it is facing rapidly increasing pressure from deteriorating market conditions in the subprime credit sector. The San Francisco-based company said that it now expects to report $1.35 million in losses for 2006; in late December, the company had said it expected to lose $900,000. Primarily an investor in residential subprime mortages, CAIT lost $307,308 during 2005. In a letter to shareholders, CAIT president Richard Wrenson said that approximately 34 percent of the REIT’s mortgage loans are currently classified as non-performing assets, as measured by mortgage payments delinquencies in excess of 60 days. Hinting at future insolvency at the mortgage operation, Wrenson also said the non-performing loans represent 95 percent of common shareholder equity, due to the company’s highly-leveraged mortgage loan portfolio. “Until this situation improves, management will focus on curing these delinquencies, in order to restore income and protect shareholder value,” said Wrenson. “Until these ratios improve, operating income and new business initiatives will remain constrained.

“2006’s fourth quarter financial results will require additional loan loss expenses to account for the mortgage portfolio’s identified losses. If the residential housing market continues to soften or if the economy slips into a recession during 2007, additional reserves may be needed,” he said. Curing outstanding subprime delinquencies would seem to be a large task for the troubled mortgage operation, with subprime defaults skyrocketing during 2006 and into early 2007. With that in mind, Wrenson also noted that the company will begin pursuing other investments outside of subprime residential mortgages, in an effort to limit the company’s exposure to the credit sector. “Given the present business environment, CAIT’s operating experience and the performance of recent, non-conforming, residential mortgage loans, new investment opportunities outside whole loan residential mortgage investments will be initiated,” Wrenson said. “CAIT intends to remain a real estate investment trust that opportunistically invests in REIT-compliant assets, other than residential mortgages.” Not surprisingly, the troubled REIT has suspended dividend payments to shareholders pending a return to profitability, something industry insiders have told Housing Wire is unlikely at this point. “They’ve cast their lot in the subprime space, which made them some money when the yield spreads were there,” said one industry source, who wished to remain anonymous. “Now that the credit sector is falling off a cliff, they want to get out there and buy into other assets — and I don’t think it’s possible at this point given how highly leveraged the company already is.”