May 13, 2007

Toxic Mortgage Companies

Do your own research and make your own plans.

FED
BKUNA
CFC
IMB (formerly NDE)
DSL
WM

Judgement day could be a ways off. Or not.

Posted by blogger at 5/13/2007

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8 comments:

Anonymous said...

Only a matter of time

May 13, 2007 10:05 PM
Anonymous said...

I think they will play the Enron and Worldcom game. They will keep hiding the losses until one day you wake up and read about CFC filing bankruptcy.

May 13, 2007 10:35 PM
Anonymous said...

probably wont even hear about it. the "Liberal" media just wont mention it

May 14, 2007 12:14 AM
Anonymous said...

"It's all about oil isn't it?????"

Robert Redford to Cliff Robertson

3 Days of the Condor

May 14, 2007 12:31 AM
Anonymous said...

Better be before Friday because I got 10 each puts riding on CFC and IMB!!

I'm hosed!

May 14, 2007 1:51 AM
Anonymous said...

Depending on their charter, WaMu, IndyMac, and Downey are scrutinized by the FDIC or other regulators, on a regular basis. Insured deposits don't come without strings attached, and they do not like to pony up monies due to poor lending...and it doesn't matter if they're in-house loans or loans to be packaged & sold but are under water.
A sharp bank examiner could spell big trouble for these guys....these are, indeed, interesting times.

May 14, 2007 2:46 AM
Anonymous said...

Lending's next tsunami?
Borrowers in the credit niche above subprime are missing more home loan payments. Another crop of lenders is trying to regroup and stem loan losses.
By MATHEW PADILLA
The Orange County Register

Michael Perry, chief executive of IndyMac Bancorp, is stubborn when it comes to delinquent loans.

He refuses to ditch them, even as they expand rapidly on the books of Pasadena-based IndyMac, which has two units based in Irvine and is the largest U.S. lender in a credit category dubbed "Alt-A," which is one level above the risky subprime niche. It turned in a company record of $90 billion in loans last year.

During an April 26 conference call with analysts, Perry said the company didn't sell a single dud loan in the first three months of the year because no one wanted to pay what he thinks they're worth. No way is IndyMac selling to a hedge fund for "pennies on the dollar," Perry said.

In that time, IndyMac's sour loans and foreclosed real estate ballooned 75 percent to $324 million.

"We are not going to fire-sell when we have the intent and ability and expertise to work through those loans and sell them ourselves," he said.

But Indymac and others who deal in Alt-A loans, such as Impac Mortgage Holdings of Irvine and Downey Financial of Newport Beach, may not have time to wait. The same problems shaking up the subprime market are now emerging in the Alt-A industry.

What's more, a Register analysis shows reserves for loan losses by these companies are not keeping pace with delinquent loans. Analysts say the same problem bedeviled New Century Financial of Irvine last year – and that helped send the once-top U.S. subprime lender into bankruptcy court after its financial backers lost faith in its accounting and liquidity.

Impac – which just announced layoffs and mounting losses last week – is the most highly leveraged of the three companies examined by the Register. Its reserves covered a small portion of its delinquent loans at the end of 2006.

Joseph Tomkinson, chief executive of Impac, said in a March interview that media coverage of the subprime shake-up is overblown. "The sky is not falling," he said. And he said his company, dealing in the credit category above subprime, is better positioned to weather the housing correction.

THE ALT-A MARKET

Alt-A loans once were limited to people with good or pretty good credit who didn't qualify for the best mortgage rates. The original Alt-A borrowers had little money for a down payment or a minor credit issue, and so received an interest rate higher than prime but not as high as subprime.

Over time, more and more borrowers took advantage of the ability to qualify for a loan while providing less documentation.

The more housing prices rose, the more popular Alt-A loans became. Alt-A loans, experts say, make it easier to qualify for more debt. Many people took advantage of that looser standard to get a loan with a low "teaser" payment in the short run.

"The most creative mortgage products came out of the Alt-A business," said Manuel Ramirez, an analyst with Keefe Bruyette & Woods in San Francisco.

Last year, 20 percent of home purchase loans were Alt-A, up from 5 percent in 2002, according to a March 12 report by Credit Suisse.

The report said lenders took too many risks with Alt-A loans last year. For example:

* On average they loaned 88 percent of the value of a home, with 55 percent of homebuyers taking out a simultaneous second mortgage, suggesting such borrowers didn't pay mortgage insurance and borrowed the full value of the home.
* Low or no documentation loans represented 81 percent of all Alt-A purchase loans in 2006, up from 64 percent in 2004.
* Loans with a one-year fixed "teaser" rate accounted for 28 percent of Alt-A purchase loans last year, "setting the stage for considerable reset risk" when the teaser period ends.

SIMILARITIES TO SUBPRIME CRISIS

Ramirez said it's "eerie" how the subprime correction appears to be repeating in Alt-A.

"Compared to subprime it's at a snail's pace but I think it's real," Ramirez said.

Data on homeowners missing their monthly payments seem to fit his assessment.

Alt-A delinquencies hit 2.90 percent in February, more than double 1.23 percent a year ago, according to First American LoanPerformance, which tracks loans sold to investors as securities. Yet while that's much greater than 0.47 percent for prime loans, it's far from the 14.79 percent for subprime.

Analysts say delinquencies are rising in the Alt-A sector for the same reasons as subprime: too many loans made with little or no down payments combined with little or no proof of income. That's a combination sure to backfire as soon as home prices dip, experts say.

Bad loans are mounting on the books of Alt-A lenders. Yet their reserves for loan losses aren't keeping pace, according to a Register analysis of filings by Impac, IndyMac and Downey, as well as interviews with analysts and federal regulators.

Lenders have a real incentive to keep reserves low. If companies set aside more for loan losses, their profits drop proportionally, according to accounting rules. Their actual exposure to losses is limited, because most loans are sold on Wall Street these days. And keeping reserves low is not necessarily against accounting rules, experts say. Companies have plenty of leeway in their accounting.

However, analysts say if reserves don't keep up with delinquent loans, they question the reliability of profit statements by lenders. It means lenders are making rosy predictions about their ability to keep loans out of foreclosure, even as home prices are weakening.

IMPAC's AGGRESSIVE ACCOUNTING

Impac Mortgage was slow to add to its reserves for loan losses last year even as its delinquent loans ballooned, according to a Register analysis of its audited 2006 annual report with the Securities & Exchange Commission and interviews with analysts.

Last year, its loans that were 60-plus days past due jumped 85 percent to $1.36 billion. Over that time, its reserve grew just 17 percent to $91.8 million.

In a Feb. 27 report on Impac, Richard Eckert, an analyst with Roth Capital Partners in Newport Beach, said the reserve should have been closer to $150 million.

Under Eckert's view, Impac's loss of $75 million in 2006, should have been closer to $133 million – the difference between its reported loss reserve and what Eckert believes the reserve should have been.

Gretchen Verdugo, chief financial officer at Impac, said Eckert's analysis was a bit "cursory" and that Impac performs a more detailed review under accounting rules. She said the company's $91.8 million total reserve was correct at the time.

And she said in the first quarter the company's actual loss on loans was $11.3 million, which suggests the reserve is more than enough to cover losses.

According to Verdugo, delinquencies appear to be rising quickly now because there were so few during the housing boom. "You should expect increases in delinquencies as housing price appreciation slows down."

Eckert said he is not suggesting Impac broke any accounting rules; he disagrees with the company's assumptions about their ability to deal with bad loans and the condition of the housing market.

"There is quite a bit of latitude," Eckert said. "The position I staked out is just that, it's my opinion. I think that actual foreclosures are going to ramp up pretty steeply this year and they already have. They will have to make up provisions (for losses)."

Since Impac doesn't take deposits from consumers, Eckert said it has fewer sources of funds to make loans than thrifts such as IndyMac and Downey. It's in a more precarious position.

But, Eckert said, Impac made some smart moves last year, being one of the first Alt-A lenders to cut back on loan volume and focus on stricter lending rules. By comparison, IndyMac had a record year last year for loan volume.

On Thursday, Impac reported a $121.7 million loss for the first quarter, and said it set aside an extra $29 million for future loan losses. It "liquidated" $52 million in delinquent loans in the period. Much of the losses were on paper only, and its taxable income actually increased from year end to $18.9 million.

However, last week it laid off more than 100 workers, or roughly 13 percent of its 800-plus staff. CEO Tomkinson said the layoffs were a necessary response to the housing correction.

OTHER COMPANIES

In IndyMac's case, its 75 percent expansion of bad loans in the first quarter far outpaces its 8 percent increase in loss reserves to $68 million.

IndyMac executives, via a spokesman, declined to be interviewed for this story. However, they did respond by e-mail to questions. The company said it is setting aside enough money, and that its reserve is set before loans go bad, not after.

The company said it's natural during a housing market downturn for the reserve to lag delinquent loans.

John Potthast, a field manager with the Office of Thrift Supervision, said there is no industry standard for such a reserve. He said there is more to consider than the number of delinquent loans on a company's books.

"Just because there is an increase in delinquencies, that does not necessarily translate to losses and foreclosures," Potthast said. He declined to specifically discuss IndyMac or any other company.

At Downey Financial, the company lowered its reserve in the first quarter, while its loans 60 days or more past due increased 20 percent. Calls to Downey's chief financial officer were not returned.

MORTGAGE MODEL FLAWED?

Losses, bankruptcies and layoffs at companies that buy and sell loans are vulnerable to sudden changes in what investors are willing to pay for their mortgages.

The heady profits lenders enjoyed during the housing boom have evaporated, and some analysts question whether their business model was ever meant to survive a housing downturn.

Eckert goes so far as to say pure mortgage companies have no place in tomorrow's world dominated by investment banks, large financial firms and big diversified lenders that take deposits from consumers, such as Countrywide Financial.

Mortgage bankers who focus heavily on buying and selling loans, such as Indymac and Impac, generally are gambling that they'll make a profit from the sale of loans, he said. They have little control over what they can charge mortgage brokers, because competition is fierce, and they have to accept whatever Wall Street is willing to pay for the loans.

"The mortgage banker sits right in the middle, and it has no leverage, no control over parties on either side," Eckert said. "You can underwrite to the highest standards, but if bond markets are spooked enough they won't offer you a price that approximates your cost."

Contact the writer: 714-796-6726 or mapadilla@ocregister.com

May 14, 2007 4:19 AM
Anonymous said...

Try to short IMB. No shares available. Apparently nobody is long on this one.

May 14, 2007 6:26 AM

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