Posts for Ticker ‘Subprime’

Subprime & CDO Meltdown Worse than RTC/S&L Crisis

There is a new study out that has compared the current mortgage and subprime meltdown to the S&L and consumer crisis of the 1980’s that led to the creation of Resolution Trust Corp. (the "RTC").  The results are not promising for any optimists other than those named Pangloss.

Navigant Consulting, Inc. provides business, regulatory and financial advisory services and it has released a study showing that the number of subprime-related cases filed in federal courts is already out-pacing the S&L crisis litigation in the early 1990’s.  This study noted that that subprime cases in 2007 already equaled half of the total 559 S&L cases handled by the RTC over a multi-year period, although this is only measuring federal court cases filed.  This notes that of the 278 cases filed in 2007 some 43% came from borrower class action suits, 22% came from securities cases, and 22% came from commercial contract disputes.

247WallSt.com would note that these only represent the cases for 2007.  The cases in 2008 are likely to dwarf the 2007 cases since these take time to file and much of the pending damages have either not yet happened or have not been able to be quantified.  The real damages and issues in 2007 were also not until the second half of the year.

We haven’t even seen all of the counterparty blow-ups come to pass yet.  We have yet to see any of the major financial institutions fail, and all of the bond insurers are still surviving.  Warren Buffett will only save entities that make financial sense.  We believe that the headlines coming are only going to get worse before they get better.  Stocks will continue to act on their own, and when these financial stocks do ultimately turn it will be long before we start seeing actual good headlines.  There is a reason we noted that financial mergers may become mandated rather than preferred.

Ultimately things will get better.  But there is much more pain to come.

Jon C. Ogg
February 14, 2008

Posted on: February 14, 2008 – 1:37 pm in Economy, Financial Stocks, , , , ,

State Street, Not Immune To Subprime (STT)

State Street Corporation (NYSE:STT) has announced that it will record a net after-tax charge in the fourth quarter of 2007 of $279 million, or $0.71 per share. The charge is to establish a reserve to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by State Street Global Advisors, the company’s investment management arm, and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent.

Can you say "fiduciary responsibility" issues? 

In aggregate, the reserve will be $618 million on a pre-tax basis. The impact to earnings of the net charge, after taking into account the tax effect of the reserve and associated lower incentive compensation cost, will be $279 million.

State Street also announced that James Phalen, executive vice president and head of international operations for investment servicing and investment research and trading, is returning to SSgA as interim president and chief executive officer. Phalen succeeds William W. Hunt who has resigned from State Street.

Earnings per share for 2007 are expected to be between $3.42 and $3.45 per share, and return on equity is expected to be approximately 13%, all on a GAAP basis.  On an operating basis 2007 earnings per share is expected to be between $4.54 and $4.57 per share and return on equity is expected to be approximately 17.5%.  We have a First Call estimate of $4.19, although we’d caution that these charges will make any direct comparison ‘cloudy.’

Jon C. Ogg
January 3, 2008

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Posted on: January 3, 2008 – 6:48 am in Accounting, Banking, Earnings Warning, Financial Stocks, Restatements, , ,

Countrywide Mortgage Tricks Continue (CFC)

The subprime mortgage malaise is quite multi-faceted.  The borrowers are at fault for overextending themselves.  The lenders are at fault for making loans that are a stretch.  Realtors exacerbate the problem by artificially boosting prices.  And the builders will keep building as long as they have access to construction loans. 

Just when it seems that the mortgage madness is trying to work itself out, there was a surprise in the piles of mail this weekend: a 40-year mortgage offering from Countrywide Financial Corp. (NYSE:CFC).  It seems that the lenders are still willing to play financial games to keep loaning money.  Unfortunately this isn’t really new at all.  But it shows that at least this lender is willing to keep the games alive in overextending credit.

Back in 2006, Bankrate.com was reporting on the proposed 50-year mortgages.  Japan had or has those 100-year mortgages available so that children (and maybe Grandchildren) can buy and own property that would otherwise be unavailable.

The current 30-year and even 15-year mortgages are sort of a hoax when you consider the fact that the amortization table is almost entirely interest upfront.  On a 30-year mortgage with a 6% interest rate with a $1,798.65 monthly payment, a borrower at month 60 still owes $279,163.07 in principal.  The same 6% rate mortgage for 40-years has a $1,650.64 payment, but at month 60 the remaining principal is $289,489.78.  The 15-year mortgage with a 6% rate is much more expensive with a $2,531.57 payment but is at least a bit more skewed with the principal remaining at month 60 as $228,027.30.

The value of dirt usually appreciates through time.  But many of these newer structures built don’t seem to be built as sound as prior generations of homes.  The thought of some of these three-story toothpick structures having a 30-year life seems like a stretch.  There is no doubt that these ‘more creative mortgages’ make what would have been out of reach into something more attainable.  But that is still part of the problem. 

Maybe this is a harsh assessment here, but it really just seems that many U.S. borrowers still need to be renters rather than temporary owners.

Jon C. Ogg
October 15, 2007

Posted on: October 15, 2007 – 8:28 am in Banking, , ,

Accredited Home Lenders Still Has Hopes Of Merger, But… (LEND)

LSF5 Accredited Investments, LLC, the subsidiary of Lone Star Fund V that had offered in June to acquire Accredited Home Lenders Holding Co. (Nasdaq: LEND), announced that it is extending its tender offer for all outstanding shares of common stock until 12:00 midnight on September 14, 2007, in accordance with Lone Star’s obligations under the merger agreement with the Company.  If you read the press release, you’ll see right away that this is not a done and final deal as far as Lone Star is concerned, although it is still not as dead as fears of the subprime meltdown led to in August.

Read More »

Posted on: September 13, 2007 – 8:06 am in Financial Stocks, , , ,

Central Banks Step In: Injecting Liquidity Rather than Cutting Rates

There are more reports of world central bank interventions today.  The European Central Bank stepped in and providing added liquidity.  The Associated Press put today’s figure at $83.9 Billion and Bloomberg put the figure at $83.6 Billion.  The exact number isn’t as important as the scale and the fact that it is substantial. That makes over $200 Billion out of Europe alone depending on which reports you read that has been injected into the system if you include yesterday.

Yesterday the Federal Reserve injected liquidity into the financial system twice yesterday.  Today the Federal added $19 Billion buy buying mortgage-backed securities.  The amount tendered was $31 Billion and that $19 Billion is what was accepted.  The Fed also left the window open again, and I believe they can step in twice more if they choose to.  But this tender is interesting because this gets those mortgage backed securities off the books of some chartered banks.  The bad news is that if you assume that these are Freddie-Mac or Fannie-Mae conforming loans and gave them an average home loan face of $250,000.00 this represents only 76,000 homes if you wanted to look at this on a nominal face value basis.  I admit that this is not how the real calculations are made, but it is a very loose representative figure that can put some things in perspective.  A Billion dollars just isn’t what it used to be.  But this is a start.  It probably isn’t enough by the tone, but nonetheless it is a start.

What is interesting is that the malaise yesterday gave the chance for a September meeting rate cut at 100% and some are pointing that Fed Fund futures are showing that there is basically a 100% chance of an emergency rate cut.  We have spoken with numerous traders, analysts, and a good old fashioned economist this week.  The verdict is that the liquidity crunch and credit issues need to be fueled right now rather than actual rate cuts that further weaken the greenback.  A rate cut won’t actually help a subprime borrower that is inverted in the housing price that no longer qualifies for a mortgage even at a 2% rate.  The credit criteria has tightened to the point that some more housing pain has to come either way and there probably won’t be any solid fix for some of the funny money mortgages.  This liquidity will help the institutions right here and right now.  Sometimes protecting the system rather than all the participants is more important, and this is one of those instances.  The pain is not yet over, but if this continues it will minimize the fallout and will lower the chances of a collapse in the financial system. 

Now for the real question: Is this a $500 Billion problem, or is it a $3 Trillion problem to fix?

Jon C. Ogg
August 10, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: August 10, 2007 – 8:29 am in Economy, , , ,

Countrywide Punished Over Quarterly SEC Filing Disclosures (CFC)

Countrywide Financial Corp. (NYSE:CFC) has filed its 10-Q quarterly report with the SEC, and the stock has gotten hammered in after-hours trading with a drop of more than 10%.  Investors should understand that many of these comments may have been included in prior filings and may have already been telegraphed by the company.  But right now in our credit crunch and liquidity squeeze Wall Street is just shooting first.  It isn’t even that they will ask questions later, because right now it’s just a status of shooting and walking away. 

Many of the pre-packaged quarterly disclosure statements and possible scenarios outlined herein sound ghastly as well, but these are frequently covered as risk factors in every filing.  After a huge down day like today, it’s no wonder that after-hours trading is being so hard on Countrywide.  After this reaction to a quarterly filing, you can bet that Countrywide’s CEO Angelo Mozilo will be on CNBC and elsewhere in media outlets Friday trying to bring about at least some calm and to state that many of these disclosures are routine (or at least somewhat) in the sector.

The company has also said that it believes the changes may hurt near-term but will ultimately help it in the long-run.  (If this was truly believed on the surface, then the shares wouldn’t be down over 10% in after-hours.)

Page 94 OFF BALANCE SHEET TRANSACTIONS
….
We do not believe that any of our off-balance sheet arrangements have had, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Our material contractual obligations were summarized and included in our 2006 Annual Report. There have been no material changes outside the ordinary course of our business in the contractual obligations as summarized in our 2006 Annual Report during the six months ended June 30, 2007.

Here are some of the comments on the next page out of the end of the SEC filing that are hitting the stock:

Read More »

Posted on: August 9, 2007 – 6:58 pm in Banking, Financial Stocks, , ,

FOMC Acknowledges Concerns, But No Real Rescue Feelings

The FOMC has spoken, and as expected rates were left unchanged at 5.25%.  Here were they key phrases we looked at:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Economic growth was moderate during the first half of the year.  Financial markets have been volatile in recent weeks, credit conditionshave become tighter for some households and businesses, and the housingcorrection is ongoing. Nevertheless, the economy seems likely tocontinue to expand at a moderate pace over coming quarters, supportedby solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months.However, a sustained moderation in inflation pressures has yet to beconvincingly demonstrated. Moreover, the high level of resourceutilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, theCommittee’s predominant policy concern remains the risk that inflationwill fail to moderate as expected. Future policy adjustments willdepend on the outlook for both inflation and economic growth, asimplied by incoming information.

The Statement from the June 28, 2007 meeting still noted moderate growth despite the ongoing adjustment in the housing sector.  The FOMC needed to address this housing to include serious recent changes in lending markets.  It also previously said it expected the economy to continue to expand at a moderate pace over coming quarters.  The FOMC also stated on June 28: In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

CONCLUSION……

No one was expecting a rate cut today.  What was expected was more accomodative and easier language that showed concern about the credit markets.  The FOMC isn’t showing any real concern over the market malaise in housing and the liquidity crunch seen in the credit markets.  This is not going to be viewed a Federal Reserve that is nervous nor one that is going to come to the rescue any time soon.  So far the DJIA, S&P 500, and NASDAQ have dropped well into negative territory since Bernanke & Co. have spoken.  The market probably won’t think these guys are completely asleep at the wheel, but there definitely isn’t any sense of this FOMC wanting to be a guardian angel.

Many of these initial post-FOMC market reactions are rapidly reversed, and the Fed-Speak language here is always open to at least some ongoing interpretation.

Jon C. Ogg
August 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: August 7, 2007 – 1:23 pm in Economy, , , , , ,

Cramer Thinks Thornburg Mortgage Will Be Fine (TMA)

On today’s STOP TRADING segment on CNBC, Jim Cramer said that Thornburg Mortgage Inc. (NYSE:TMA) is one of the companies in mortgage land that is bad short that will hurt the traders betting against it.  Cramer thinks that many of these mortgage companies are really at risk, but Thornburg isn’t one of them.  Despite that many of their loans are stated income, the company has shown over and over how they pick through some of the riskier loans.  After all, Cramer just created his "Mortgage Market Madness Index" on Friday, and this was one of the components.  Earlier today he noted again that some homebuilders could be at risk as well.

Jon C. Ogg
August 6, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: August 6, 2007 – 1:56 pm in Cramer, Financial Stocks, , , ,

Accredited Home Lenders, Maybe Not So Accredited (LEND, AHM)

Accredited Home Lenders Holding Co. (NASDAQ:LEND) is in trouble this morning.  Shares were down 30% in pre-market activity after an SEC Filing from the company warned of solvency issues, although the trading has improved a bit since then.  The company even issued a ‘going concern’ note on itself.  Apparently the company is worried that after the debacle at American Home Mortgage (NYSE:AHM), creditors and lenders may place margin calls on it as values of the underlying mortgages come under more and more questions.  Unfortunately it can have these margin calls on a one-day notice.  This wouldn’t be the first margin call it ever received, but things have deteriorated further and finding firms that are willing to be white knights or that can come to aid is nearly impossible right now if you are a lender in the soup.

Lone Star Funds has a buyout offer for Accredited Home Lenders, but the obvious fear is that it will either back out entirely or that it will take the juice out of the buyout.  The company is also trying to renegotiate terms to avoid defaulting and avoid a liquidity crunch.  It is also now delinquent in SEC filings.  Accredited Home Lenders shares are down over 20% to just over $6.25.  Its 52-week trading range is $3.77 to $47.82.

How would you like to own that at $40+ and be wondering if the company can make it back up there?  You know that happened to some.  Ouch.

Jon C. Ogg
August 2, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: August 2, 2007 – 8:40 am in Financial Stocks, SEC, Shareholder Issues, , , , ,

American Home Mortgage Reopens For Trading, Under $2.00 (AHM)

American Home Mortgage (NYSE:AHM) has finally repoened after being closed for a day and a half.  Indications were going around the street have been noted as lows as an implied $1.00 to $2.50, but shares are under $2.00… Shares were halted all of Monday, but it had traded down 45% in pre-market activity yesterday morning after the news release.

Yesterday the shares were halted because it said that margin calls were going to prevent it from being able to pay a dividend.  Today the news is that the secondary mortgage market disruption and credit risk concerns are preventing it from being able to borrow.

The Company said it has received and paid very significant margin calls in the last three weeks and has substantial unpaid margin calls pending.  American Home saidf it is now unable to borrow on its credit facilities and was unable to fund its lending obligations yesterday of approximately $300 million. It does not anticipate funding approximately $450 to $500 million today.  It also retained Milestone Advisors and Lazard to assist in evaluating its strategic options and advising with respect to the sourcing of additional liquidity including the orderly liquidation of its assets.

Yesterday we even noted how this may bury the company, but you never know who may step up to the plate.  It wouldn’t be too much of a shock if the company gets an NYSE delisting notice soon.  Subprime woes continue, and then some.

Jon C. Ogg
July 31, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: July 31, 2007 – 1:14 pm in Financial Stocks, , ,

Just In Case…. Cramer Outlines the Doom & Gloom Scenario

On tonight’s MAD MONEY on CNBC, Jim Cramer said he is going at least address the doomsday scenario in the financial markets even though he doesn’t think it is reality.  This would be the extreme bearish scenario just in case the worst thing happens.  Just in case…. The 3 groups in trouble are homebuilders, banks and mortgage brokers, and brokerage firm stocks. 

Homebuilders are a total mess, and the only one he thinks isn’t a disaster is MDC (NYSE:MDC). South Forida, Phoenix, California are all in trouble and way overbuilt and he thinks some homebuilders could go under in theory.  Out of the lenders Countrywide (NYSE:CFC) is the only honest one about exposure and how bad some of it is.  The worst case is that 50% of home buyers could walk away, although Cramer doesn’t think that will occur.  The brokers could lose all the private equity business and lose all the mortgage and derivative lending.  They could even see estimates fall 50% and they could see numerous headcount reduction.  Bear Stearns (NYSE:BSC) is in these the deepest, but all the brokers are in the same boat.

Later on MAD MONEY, Cramer did note that if the FED does end up cutting rates, then you could actually see these stocks soar.  He even noted that emergency rate cuts could add 50% to some of these names.  Now before you go panic, keep in mind that this isn’t what was being predicted.  But this is what the absolute worst case scenario believers are thinking.  Cramer doesn’t think this is going to happen. 

I don’t believe this will happen either, for whatever that is worth.  I recall seeing these debt implosions left and right affecting private and public pension funds back in the mid 1990’s, and it blew up many firms and many jobs were lost as a result.  These "toxic waste" products cause a lot of pain, but if they crater the economy and implode many of the large diversified brokers and investment houses then the world has changed.  In fact, that means the tail will have wagged the dog.  These deep implosions always overreact and in the end will create some great opportunities for those with the fortitude and foresight on being the right timers to buy.

Jon C. Ogg
July 30, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: July 30, 2007 – 6:34 pm in Cramer, , , , , ,