CFC: Any idea why this POS is back to climbing?
I think it is the same deal that DSL is climbing today. As long as default rate don't go up, DSL/CFC of the world don't need to deal with reserve and their earning is intact. I looked into some of DSL number today. Posted in Calculated's Blog about some of my thoughts and end up selling all my CFC put... Esssentially you have to bet major default climbing in the next couple Q for the put to work. And from the DSL number, look like it is not in the card yet...
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I think the question is what is a reasonable reserve in relationship to the non-performing loan. For DSL, the non-perfoming loan is about 0.94%. And the 3/31/07 loss provision: $62m on $12.45b of loans = 0.50%. Anyone has a rule of thumb on what is reasonable reserve? It look o.k. to me since more than 1/2 of non-performing loan normal will get back on payment. And loan loss severity in subprime land is about 30 to 40% of loan once it default. So the acutal loss for 0.94% non-performing loan can be in the range of 0.94x0.5x0.4=0.19% of the overall loan.. Since DSL already reserved 0.5% of loan value. This look o.k. to me. Tanta and other who are more familiar with loan reserve requirement, what is your take?
biz.yahoo.com 0704...0704...028.html? .v=100
"Non-Performing Assets
Non-performing assets increased during the quarter by $33 million to $143 million and represented 0.94% of total assets, compared with 0.68% at year-end 2006 and 0.22% a year ago."
xofruitcake | 04.18.07 - 1:00 pm | #
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xofruitcake, I'd have two concerns with that. First, look at the rate of increase in NPAs. Reserves are supposed to project out for the next 12 months. You're assuming that 0.94 is the rate over the next year, not just the rate this quarter. But the trendline doesn't justify that to me.
Second, the issue (as the OTS notes) with neg am is that their NPA numbers can be very deceiving: the whole point of neg am is to have a loan that can be in trouble before it appears to be in trouble (i.e., the borrower starts making minimum payments where another borrower with a regularly amortizing loan would just stop making payments). So the rate of increase in capitalized balances must suggest to you that things are not all well for the future. The only thing in my mind that could justify DSL's reserves is the belief that it won't blow up until at least Q207. That doesn't comfort me any.
Tanta | 04.18.07 - 1:30 pm | #
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Tanta, someone from a different board helped me look up some old DSL filing in the 96. And these were 96 95 94 93 92 91 numbers. In that time frame, their loan loss a a percentage of the loan portfolio is between 1 to 2% and the loss severity is between 45 to 66% of the loan.. So if we go with historic norm (taking the average of these period), the reserve should be around 1.5%x0.55=0.83% of the portfolio. If we think the becuase of neg amt, the loss severity is higher per loan, we are look at may be 1% of the loan portfolio as the correct reserve.. So DSL potentially is under reseved by 62M?? I don't have a position in DSL but I have put on CFC and to me, 62M under reserve is not going to break DSL in anyway. Unless we are making a case to say that the non performing loan will go to 5 or 10% in the next couple quarter, it seems DSL is safe here..
edgar.sec.gov 000002.txt
Allowance for loan losses as a percentage of ............. 66.84% 35.67% 49.29% 47.72% 45.30%
non-performing loans
Non-performing assets as a percentage of total assets .... 1.19 2.09 1.41 2.01 1.94
xofruitcake | 04.18.07 - 2:31 pm | #
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