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Banking | Belts Tighten to Cope With Mortgage Mess

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John Delaney says capital markets won't stabilize until the mortgage market does.
John Delaney says capital markets won't stabilize until the mortgage market does. (By Nikki Kahn -- The Washington Post)
"2007 will be remembered as the year the real estate bubble finally burst," Peter Fitzgerald says.
"2007 will be remembered as the year the real estate bubble finally burst," Peter Fitzgerald says. (By Gerald Martineau -- The Washington Post)
Albert L. Lord of Sallie Mae doesn't expect a recession.
Albert L. Lord of Sallie Mae doesn't expect a recession.
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Washington Post Staff Writer
Monday, December 31, 2007; Page D01

The Washington region's financial sector reflects the industry nationwide, with stock prices dropping, companies incurring losses from sour mortgages and private-equity investors pulling back on takeovers because of tighter lending.

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With a slowdown -- or even a recession -- looming, things could get much worse before they get better.

"Until we have stability in the mortgage markets, the capital markets will be very difficult," said John Delaney, chief executive of Chevy Chase-based CapitalSource, which makes loans to mid-size businesses.

The mess arrives on the heels of a near-decade-long run-up in the Washington region's financial sector, where a new generation of financial entrepreneurs exploited easy access to cash and credit to invest in a raft of businesses. The activity reshaped the region's financial landscape, creating goliaths such as the Carlyle Group, mid-size lenders like CapitalSource and Allied Capital, and smaller players such as MainStreet Lender, Ramsey Asset Management and the Halifax Group.

The next few months are likely to filter those that will survive from those that will perish, while others will simply batten down the hatches and wait for the good times to return, executives said.

"The economy has slowed, but I don't expect a recession," said Albert L. Lord, chief executive of Reston student-lending giant Sallie Mae. "The credit markets tighten up from time to time. When they return to normal or something near normal, things will get better. I would have to go back to 1998 to recall anything quite of this magnitude."

Lord said the big players in the financial industry have been hardest hit because they have the most exposure to mortgage-based securities and the credit markets. That has certainly been true for some of the larger players locally.

For instance, Chevy Chase Bank of Bethesda recently laid off 300 employees; while McLean-based Capital One Financial sold its mortgage arm, eliminated 1,900 jobs and warned of hundreds of millions of dollars of losses in 2008 from bad mortgages. Subprime lender Fieldstone Mortgage of Columbia filed for bankruptcy protection, blaming an increase in delinquent mortgages. Friedman, Billings, Ramsey of Arlington, the region's largest investment bank, had $2.5 billion of market value at its publicly held FBR Group evaporate because of a bad bet in the subprime sector.

The share prices of several local banks declined. Stock superstar Virginia Commerce Bank, which a year ago was trading at nearly three times book value, now trades at less than two times book value.

They aren't the only ones. The bastions of mortgage stability, Fannie Mae and Freddie Mac, are on the defensive, reporting billions of dollars in losses from the housing downturn. Freddie Mac's stock was down more than 50 percent from its 52-week high after it reported a $2 billion third-quarter loss in November, while shares of Fannie Mae took their biggest two-day plunge in 20 years before recovering slightly in December. Both have also sold preferred stock and cut their dividends to raise capital, and the housing industry is watching closely to see whether the $417,000 limit is lifted on the mortgages they can buy.

Freddie Mac's chief financial officer, Anthony S. "Buddy" Piszel, said this month that the company will ride out the storm and be waiting to ride the economy upward if the credit crisis eases in late 2008 or in 2009.

"2007 will be remembered as the year the real estate bubble finally burst," said Peter G. Fitzgerald, a former U.S. senator from Illinois and chairman of the board of McLean-based Chain Bridge Bank, a new community bank that hopes to become a go-to financial institution for small businesses and families in Northern Virginia. "The world is not coming to an end, but bankers who gorged themselves on bubble-era real estate loans will feel as if it is."


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