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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: mishedlo who wrote (37102)	7/27/2005 5:01:53 PM
From: russwinter	of 110194

In addition to grossly underestimating loss revisions, mortgage lenders use funny money noncash accounting on teaser and IO loans: 'Non-Cash Earnings' Increasing thehousingbubble2.blogspot.com This informative WS Journal article reveals some firms holding mortgages are booking paper profits. "Option ARMs are wonderful not just for borrowers who can't afford their houses, but also for investors who look only superficially at a bank's earnings report. A bank books the entire amount that a customer owes as income each month, not the minimum payment that's actually paid. Voila, noncash earnings." "It gets better: The unpaid interest gets tacked on to the bank's outstanding loan total, allowing the bank to display loan growth, which investors love. 'You get earnings and growth. What more can you ask for?' says Keefe, Bruyette & Woods analyst Fred Cannon." "Last week, Golden West's stock took a hit after it disclosed how much its exposure to option ARMs has increased. The company reported that $160.2 million of its loans was actually unpaid interest tacked on to borrowers' principal, that negative amortization I mentioned. That's a huge leap from last quarter's $90.2 million and $27 million in last year's second quarter." "Good companies are often undermined by the irrational practices of competitors. It's not quite fair of me to pick on Golden West. I do so only because it fully discloses its exposure." "Herb Sandler says Golden West's lending practices are disciplined, so it won't get into trouble. The only risk, he concedes, is that home prices decline broadly, in which case all mortgages suffer, regardless of structure. "

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