Housing MarketMortgageSecondary

Rumors of Credit Suisse’s death are greatly exaggerated  

Still, the lender, and the European economy overall, face major challenges that impact the U.S. housing market

Switzerland-based global lender Credit Suisse Group AG had a rough start this week after its stock was beaten down by 11%, the value of its riskiest debt fell more than 10% and the cost of purchasing derivatives insuring against the bank defaulting rose sharply.

The bank’s stock eventually recovered most of the losses by the end of the day Monday, Oct. 3. Still, the global lender’s market capitalization is at about half of what it was at the start of the year and its earnings for the first half of the year are in the red. 

Adding to the global lender’s woes this week was investor speculation on social media questioning the bank’s stability. That speculation raised the specter among some market watchers that if Credit Suisse did fail, it might trigger a global contagion similar to the Lehman Brothers’ crash that helped to spark the Great Recession a decade and a half ago.

That concern is overblown, according to several market experts. Even so, Credit Suisse is pursuing a restructuring effort that is expected to result in asset sales that will affect global markets to a degree, including the private-label mortgage securities market in the United States — where the European lender also operates.

“Oh my, this feels like a concerted effort at scaremongering.”

– Boaz Weinstein

With respect to the contagion fears, however, Citigroup analyst Keith Horowitz, in a recent research note, wrote that “we don’t see cause for concern.”

“We believe the U.S. bank stocks are very attractive here,” Horowitz said, according to a recent MarketWatch report. “We understand the nature of the concerns [with Credit Suisse], but the current situation is night and day from 2007 as the balance sheets are fundamentally different in terms of capital and liquidity, and we struggle to see something systemic.”

Boaz Weinstein founder of the hedge fund Saba Capital Management said in a post on Twitter related to the social-media generated speculation over Credit Suisse facing the prospect of collapse: “Oh my, this feels like a concerted effort at scaremongering.”

Easy target

Credit Suisse in some ways is an easy target for critics.  Last year, the bank incurred billions of dollars in losses linked to the failures British financial firm Greensill Capital and a U.S. fund called Archegos Capital Management

In addition, U.S. Department of Justice announced in October 2021 that Credit Suisse pleaded guilty to a conspiracy to commit wire fraud and entered into a three-year deferred prosecution agreement with the lender.

“Credit Suisse Group AG, a global financial institution headquartered in Switzerland, and Credit Suisse Securities (Europe) Limited, its subsidiary in the United Kingdom, have admitted to defrauding U.S. and international investors in the financing of an $850 million loan for a tuna fishing project in Mozambique, and have been assessed more than $547 million in penalties, fines, and disgorgement as part of coordinated resolutions with criminal and civil authorities in the United States and the United Kingdom,” a press release issued by the U.S. Department of Justice states

Then, in May of this year, the United Kingdom’s Financial Conduct Authority put Credit Suisse on a watchlist for institutions deemed in need of stricter oversight, according to a report by the Financial Times

Despite the warts, Credit Suisse still has one of the strongest capital ratios among its peer lenders, 13.5% as of the end of Q2, well above the 9.6% minimum required level, and also boasts a $100 billion capital buffer, according to bank officials. 

Some of the speculation over the global bank’s fate was sparked by a recent memo sent to employees by Credit Suisse’s new CEO, Ulrich Korner. In the memo, he indicated a new business strategy for the bank would be unveiled later this month when Credit Suisse announces its third-quarter earnings. The lender recorded a net loss of nearly $1.9 billion over the first half of 2022, according to its most recent earnings statement.

“The bank is currently executing on a number of strategic initiatives including potential divestitures and asset sales,” Credit Suisse said in a recently released statement, Bloomberg reported.

Among the asset sales on the table is the lender’s securitized products group, according to a report by S&P Global Market Intelligence. The Credit Suisse trading business, with an estimated $75 billion in assetsencompasses the global bank’s U.S. residential mortgage-backed securities (RMBS) operations.

“Credit Suisse will explore ‘strategic options’ for its securitized products business, including opening it up to third party capital,” the S&P Global report states.

Apollo Global Management Inc. and BNP Paribas SA are among the parties seeking to acquire a stake in the business unit, Bloomberg reports, adding that Credit Suisse also would likely retain an ownership share in the business.

“Our trading platform [the securitized products group] provides market liquidity across a broad range of loans and securities, including residential mortgage-backed securities (RMBS), asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS),” Credit Suisse states in its 2021 annual report. 

Adds Leo Wong, a partner with New York-based Waterfall Asset Management, a global alternative investment manager with some $11 billion in assets under management: 

“I’m not sure we can comment on [Credit Suisse] and whatever potential deals that they’re working through, but they are a dominant liquidity provider in the mortgage space in particular, both on the banking side and also lending to a lot of mortgage banks or mortgage lenders.”

Credit Suisse through its subsidiary DLJ Mortgage Capital Inc., based in New York, and its RMBS conduit, CSMC Trust, has brought eight private-label securitization deals to market in the U.S. this year through September. The deals were backed by nonprime mortgage pools valued in total at $3.27 billion, according to RMBS deal data tracked by the Kroll Bond Rating Agency

For all last year, there were 11 deal issued through the CSMC Trust valued at $3.6 billion. All but two of those offerings involved nonprime loans as collateral.

“The mortgage industry has been a core investment area throughout Credit Suisse’s operating history,” states a Fitch Ratings report on major aggregators in the U.S. RMBS market. “… Loans are actively sold to various investors in both whole loan sales and securitized transactions, depending on client appetite. … Credit Suisse is also actively involved in the PLS [private label securities] secondary market as an underwriter and warehouse finance provider.”

Global headwinds

Credit Suisse may not be on the brink of collapse, but it is facing challenges as a global bank that also impact the U.S. housing industry’s liquidity channels — such as the pending ownership shift in the bank’s securitized products business. The European economy overall and the players in its housing-finance industry also are under intense economic pressures, similar to and ultimately interconnected with those now playing out in the U.S. economy.

Across the eurozone as well as in European nations not part of the European Union — including Switzerland and the United Kingdom — inflation is running hot, reaching 10% in September in the 19-member eurozone economy. And like in the United States, the central banks of Europe are raising their benchmark interest rates to combat what is, in fact, a global inflation crisis driven by rising energy and food prices as well as bottlenecked supply chains — all exacerbated by the war in Ukraine.

The bank’s performance was significantly affected by a number of external factors, including geopolitical, macroeconomic and market headwinds,” Credit Suisse’s second-quarter earnings release states. “These challenging circumstances led to results which overshadow the strength of our leading client franchises in all four divisions of the bank. The urgency for decisive action is clear….”

“Mortgage borrowers, including those who do actively switch their mortgage, face increasing pressure from the rising cost of living.”

– the FCA report

Tom Capasse, managing partner and co-founder of Waterfall Asset Management, adds that there’s more pain ahead for Europe as well. He points to data on the United Kingdom’s housing market — where millions of mortgages are set to expire over the next couple years and will need to be reset in a rising-rate environment. The Bank of England late last month raised its key benchmark rate a half percentage point, to 2.25%, the highest mark since 2008, with the annual inflation rate in the United Kingdom (UK) projected to top 10% before year’s end.

“You are going to see significant defaults [in the UK], like you saw in the 1970s and 1980s [in the U.S.],” Capasse predicted. “In terms of the relative risks in this rising-rate environment as it relates to residential credit, there’s definitely in the Commonwealth countries[going to be] significant defaults related to payment risks.”

An analysis by the UK’s Financial Conduct Authority (FCA) shows that 74% of mortgages (6.3 million) in the UK are on fixed rates typically between two to five years, and the balance (26%, or 2.2 million) carry variable rates set to some benchmark. 

“Mortgage borrowers, including those who do actively switch their mortgage, face increasing pressure from the rising cost of living,” the FCA report states. “Around half of mortgages currently arranged on fixed rates expire in the next two years.”

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