ING Taking Risks with American Savings

Credit rater Moody’s considers writing off 241 billion dollars of so-called American “jumbo mortgages.” ING Direct USA is active in that segment and thus takes a risk.

Jumbo mortgages start at amounts of $ 417,000, which are not guaranteed by American government agencies like Fannie Mae and Freddie Mac.

These are exactly the mortgages that are now under scrutiny from credit raters.

Doubts About Mortgage Type

Moody’s, one of the world’s largest credit raters, has started to doubt the solidity of these mortgages, now that more Americans are having trouble paying the interest. This is a consequence of the recession which leads to a loss of jobs.

It is currently unclear exactly how much ING has outstanding in so-called jumbo mortgages. At the end of 2008, ING had 25.2 billion euros in U.S. mortgages. Among those are jumbo mortgages, but ING refuses to say how much of those comprise the 25.2 billion euros.

ING does have 7.2 billion euros in mortgages that do not fall under American government guarantees for one reason or the other. Yet, they cannot say how many of those are jumbo mortgages.

Impact

Although ING says that the write-off of a bundle of mortgages by Moody’s does not have a direct affect the value of, or trust in, the mortgage portfolio of the bank, a spokesperson does acknowledge that the development could have an impact.

Whether it sees itself as a big player in the jumbo mortgage market, ING remains mum. ING Direct, however, is consistently being mentioned in various American media, such as the “Wall Street Journal” and the “Washington Post,” as one of the known sellers of jumbo mortgages against relatively favorable conditions.

“No Second Alt-A”

The problems surrounding jumbo mortgages cannot be compared with those surrounding Alt-A mortgages, ING states. According to the bank, these American mortgages are financed by savings that ING Direct collects in the U.S., not by arguable loan and credit constructions.

According to American rules, ING is obliged to spend the funds of savers in American mortgages, an obligation that ING, but also other banks, cannot avoid.

Different, but Not Quite

This case also differs with Alt-A bonds. The toxic Alt-A mortgages which led to a request for help from the Dutch government are securitized, which means that, based on the underlying mortgages, new loans have been issued.

ING does admit that there might be jumbo mortgages that fall under the Alt-A bonds, but cannot say how many or what their value is. But apparently there are mortgages of rich Americans whose risks have already been partially covered by the Ministry of Finance. But even then, analysts wonder if a write-off can still cause problems for ING.

Big Risks

The more jumbo mortgages ING Direct has and still issues in an unstable housing market that is in the middle of a recession, the more risk it takes. This is mentioned by a specialized analyst of a large trading house. According to him, the number of American “non-performing loans,” or loans and mortgages that get into trouble because the consumer cannot pay it off, will increase significantly this year at ING. “For 2009, I foresee a peak in the number of non-performing loans at ING. For that, ING needs to close loan-loss provisions; literally setting money aside to cover the losses. That will cost ING billions,” according to the analyst.

Unrest

The question is whether shareholders, and even the Dutch Ministry of Finance, will wait for that. According to the analyst, shareholders do not like it, considering the recent past. ING will have to determine a less risky strategy under the new president of the board, Jan Hommen.

“Shareholders want ING to start taking less risks,” the analyst states. The Dutch government has taken on 80% of the risks of ING’s Alt-A toxic credits at the end of January. Chairman of the board Michel Tilmant had to go, and the government appointed two people to ING’s board of directors. The Ministry of Finance could not comment.

Savers

As already stated, ING Direct finances the mortgages it issues with savings money that Americans bring to ING Direct. American savers will most likely not appreciate it that their money is partly in mortgages of people who are unable to pay their own mortgages. If those savers get nervous and start taking out their money from ING Direct accounts, it will create a problem that should not be underestimated. Not that a direct cause for that exists, because the American state guarantees savings deposits up to 250,000 dollars via the Federal Deposit Insurance Corporation (FDIC).

Signs on the Wall

The latest messages concerning the American housing market will possibly make Moody’s decide faster to write off the jumbo mortgages indirectly. Moody’s does not say anything about the mortgages themselves or about the financial products whose value is formed by those mortgages.

But exactly that solidity of the underlying mortgages is the cause for the value of the financial products to be written off, and the news about the American mortgage market is not getting any better.

Even though the number of sold houses slightly rose in February, the average selling price collapsed; houses cost 5.5 percent less than what was paid a year earlier. In the Western U.S., the exact area where there was a big demand for large, more expensive new houses, the average house price took a nosedive of no less than 30.3 percent, the National Association of Realtors (NAR) reports.

In the South, home prices decreased 10 percent. The lower price averages are caused by the fact that no less than 45 percent of the houses sold entered the market because of auctions or bankruptcies.

The numbers on the new house sales in the U.S. do not create any optimism. Yes, more new houses were sold, but the average new-price was remarkably lower.

Hardly Any Solutions

Owners of especially expensive homes, those with jumbo mortgages, are stuck with their possession. The price of their homes has sharply decreased, in some areas as much as one third, while their financial position has deteriorated, which makes refinancing difficult.

There are also many people who have bought a house years ago for an average price, but who had to refinance their previously average mortgage against jumbo prices, because the price of their home had sharply increased in the years before the sub prime crisis.

To sell the house and get rid of their mortgage is not an option for a lot of people because the price of their home is often below the value of the mortgage itself. Those houses are “underwater,” as it is called in American real estate agent language. Furthermore, the high-end housing market has come all but to a standstill, which has an extra downward price effect. With all this, ING has to hope that the exposure to jumbo mortgages is not all too big, as well as in the refinancing area.

ING continues

For the moment, ING Direct seems to want to keep taking risks. Where many American banks now want high interest rates for jumbo mortgages, and some banks even do not offer jumbos at all anymore, ING Direct maintains rather favorable conditions, even though home buyers on the high end will have to bring in an average of 25 percent of the loan sum themselves. Let’s hope that the American consumer continues to bring his savings money to ING Direct.