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

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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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

Lone Star may extend the tender offer for additional periods, and ifLone Star decides to extend it will issue a press release announcingsuch extension not later than 9:00 AM EST on the next business dayafter the day the tender offer is scheduled to expire. Lone Star saysit expressly reserves all of its rights and privileges under the mergeragreement with the Company, including its right to allow the tenderoffer to expire to terminate the merger agreement under certaincircumstances, as permitted by the merger agreement.  In other words,it still says it can walk away if it chooses.

Lone Star currently anticipates that the Company may make requests forfurther extensions of the tender offer and subject to and conditionedupon the merger agreement being in full force and effect and theCompany’s satisfaction of the conditions therein, Lone Star expectsthat further extensions of the tender offer may be made as and whenrequired by the merger agreement.  So it doesn’t seem likely that thiscloses tomorrow.

Here is the background and the out part for the company: On August 10,2007, Lone Star filed with the SEC an amendment to its Tender OfferStatement in which it indicated that, as of that date, the Company hadnot satisfied all of the conditions to the closing of the tender offer.As of today, Lone Star continues to believe that the conditions toclosing under the merger agreement remain unsatisfied. Pursuant to themerger agreement, so long as one or more conditions to the closing ofthe tender offer remain unsatisfied, the Company may request Lone Starto extend the tender offer, which Lone Star shall do for a period of nomore than ten business days.

As of the close of business on September 11, 2007, Lone Star hasreceived a number of tendered Company shares, subject to withdrawal,representing approximately 18,448,957 of the outstanding shares of thecompany. The shares tendered at that time included approximately 73.44%of the outstanding shares of the Company’s common stock.  Piper Jaffray& Co. is acting as Dealer-Manager for the tender offer.

Accredited Home Lenders shares are up almost 4% on thin volume as anytime there is an "extended tender period" shareholders interpret thisas "it’s not totally dead" on the merger hopes.  In early August,shares were trading under $5.00 because the merger looked entirely deadand the future of the company was at risk if it had to run on entirelyon its own.

Jon C. Ogg
September 13, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the 24/7Wall St. Special Situation Investing Newsletter and he does not ownsecurities in the companies he covers.

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.

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:

P.94 PROSPECTIVE TRENDS…. Outlook

We believe the current environment of rapidly changing and evolvingmarkets will provide increasing challenges for the financial servicessector, including Countrywide. Specifically, in the near term, we mayexperience:

·  Continued pressure on housing values and mortgage origination volumes
·  Increasing delinquencies and foreclosures
·  Continued disruptions in the secondary mortgage and debt capital markets and
·  More restrictive legislative and regulatory environments.
As a result of these conditions, Countrywide and other lenders may be experiencing, among other things, the following:
·  Lower loan production volumes
·  Lower margins on loans produced
·  Higher credit losses on delinquent loans and subordinated interests
·  Reduced access to secondary mortgage and debt capital markets and
·  Increased cost of debt.

In response to the current environment, Countrywide is making changesto tighten the underwriting guidelines for loan products offered andadjusting loan pricing to reflect market conditions. Further reductionsin the Company’s funding volume could result. Additionally, we expectto retain more loans in our portfolio of loans held for investment orto hold additional loan or security inventory until market conditionsimprove. In an effort to ensure the adequacy of our funding liquidity,we continue to transition
to more reliable funding sources, which may be more costly. We are alsooptimizing our organizational structure through, among other things,the planned integration of Countrywide Bank and Countrywide Home Loans.

While we expect these conditions may impact our earnings in the nearterm, we believe that the challenges facing the industry shouldultimately benefit Countrywide as the mortgage lending industrycontinues to consolidate.

P. 96 Housing Values

Housing values affect us in several ways……

Recently, we have seen housing price declines, including recentdeclines in housing values in many metropolitan statistical areas inthe United States. We expect housing values to remain stagnant ordecrease during the near term which will affect our credit lossexperience and may affect our willingness to offer certain mortgageloan products, both of which could impact our earnings, particularly inthe short term. Over the long term, we expect that housing appreciationwill be positively correlated with both consumer price inflation andgrowth in personal income.

P.96-97 Secondary Mortgage Market Investor Demand

Changes in investor demand for mortgage loans can have a significantimpact on our ability to access the secondary mortgage market as acompetitive outlet. In 2007, we have seen an increase in investorrequired yields, first for nonprime loans or securities followed byprime home equity loans and then nonconforming loans, together with alessening in the liquidity of such loans and securities caused byreduced investor demand. In addition, certain credit rating agencieshave announced that changes are pending to their securitization ratingsprotocol. These factors have reduced our ability and
willingness to sell such loans or securities into the secondarymortgage market and the availability and pricing of such loans toconsumers. Our gain on sale margin may be impacted in the short term.

P. 97 Impact of Declines in Credit Performance

With the current contraction in the U.S. housing market and theresulting slowdown in price appreciation (or price depreciation in manymarkets), along with worsening economic conditions, we may experienceincreased credit losses in the near term. In 2007, we have observed amarked decline in credit performance (as adjusted for age) for recentvintages, especially those loans with higher risk characteristics,including reduced documentation, higher loan-to-value ratios or weakcredit scores. Deterioration in the credit performance of these loanshas resulted in increased credit losses and impairment of our relatedcredit-subordinated interests and higher claims under ourrepresentations and warranties. Credit markets are rapidly changing andevolving and we expect these changes to impact the housing market,demand for our mortgage-backed securities, our future credit losses andthe availability of credit enhancements for the loans and securities wesell and invest in, which may impact future earnings.

P. 97 Funding Liquidity

In the third quarter through the filing date of this Form 10-Q, fundingliquidity in the financial services sector was constrained primarilydue to changes in secondary mortgage market investor demand. Variousmortgage lenders have experienced operating difficulties and haveextended asset-backed commercial paper facilities or filed forbankruptcy protection. These events have further constrained fundingliquidity in the sector.

We have maintained access to our traditional, highly reliableshort-term liquidity sources. In view of current unprecedented marketconditions, we are accessing other pre-existing funding liquiditysources, procuring new sources and accelerating the integration of ourmortgage company with the Bank. As a result of this acceleratedintegration, a significantly higher percentage of our mortgage bankingfundings will occur in the Bank sooner than originally planned. TheBank has significant liquidity sources available to fund our mortgagebanking operations. While we believe we have adequate fundingliquidity, the situation is rapidly evolving and the impact on theCompany is unknown.

Right now opinion on this won’t matter.  A drop of this magnitude is hard to ignore, and this puts the stock back within striking distance of a 52-week low.

Jon C. Ogg
August 9, 2007

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

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.

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.

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.

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.