NEW YORK (Dow Jones/AP) -- The chaos in the mortgage markets is only going to get worse in 2008 and will put a dent in U.S. mortgage bank earnings, according to a report released Tuesday by Standard & Poor's.
Next year will be the worst for mortgage bank earnings since the 1990s, the ratings agency said.
"Negative home price trends, the shutdown of the subprime mortgage market and the continued weak state of the mortgage capital markets all translate into lower growth for the mortgage industry," said Victoria Wagner, a credit analyst with S&P.
Loose lending standards, especially to people with shaky credit, are at the heart of the problem. During the period from 2003 to 2006, nonprime mortgage originations increased 150 percent, Alt-A originations rose 550 percent and second-lien home equity loans went up 133 percent, while conforming loans saw a 47 percent decline in originations, S&P said.
In 2007, mortgage correction has curtailed origination activity, with a 21.9 percent drop in originations in the third quarter. Through the first nine months of 2007, $1.980 trillion of mortgages were originated, down 12.4 percent from the first nine months of 2006. Some estimates show a 20 percent drop in originations in the fourth quarter, S&P said.
Originations in 2008 will plummet further, possibly not exceeding $1.5 trillion, S&P said.
Such a drop will affect the profitability of the mortgage banking business.
Weak underwriting standards for subprime lending in 2006 will also plague the adjustable-rate mortgages that are due for reset in 2008, the report said. About half a trillion dollars' worth of these ARMs are to reset to a higher mortgage rate as their two-year teaser rate period comes to an end.
The severity of losses in subprime and the slightly better Alt-A mortgages, as well as in mortgage-related securities coupled with higher delinquencies and credit costs, translates into "dim prospects for mortgage banking profitability in 2008," the report said.
"The financial institutions most affected by the credit repricing and market turbulence have been specialty mortgage finance companies, mortgage concentrated franchises - either in lending or capital markets - and lenders that rely heavily on structured finance for funding," S&P said.
This has resulted in a spate of negative ratings actions, which are likely to continue, it said.
Large, diversified financial institutions that have plentiful capital and the ability to shift risk exposure may be the only ones able to offset mounting mortgage finance pressures, S&P said. 