BP,
I think it would be worthwhile to have some dialog on the unfolding "subprime mortgage crisis" as the contagion already appears to have affected many companies that are seemingly remote from the actual subprime arena, such as your AHM and my GS, along with the financial sector and the market as a whole to some degree as investors fret as to the ultimate implications.
I find it rather interesting to reconcile the contrasting opinions of various gurus and experts ranging from "spillover will be contained" to those who think this will cause a recession and the biggest banking crisis since the mid-80s.
There is a sense that the snake has swallowed an elephant: lax and artificially cheap loans made especially in 2005 and 2006 on the expectation of ever increasing real estate values and now that these asset values are decreasing and the initial 2 year teaser rates are ratcheting up to nearly 7%, there will be a period that can be described as indigestion as foreclosures rise and CDO purchasers demand much stricter protective covenants going forward.
In the case of AHM, the problem appears not to have been subprime per-se, but rather "alt A" or stated income loans where income was not actually verified.
According to their mid-quarter update:
the Company's credit-related expenses have been primarily caused by the three month "timely payment" warranty the Company granted to loan buyers who purchased stated income loans with high loan to value ratios from the Company. The Company has stopped making these types of loans. Consequently, the Company believes that the high credit-related charges resulting from prior loan sales will diminish as the three month "timely payment" warranty expires.
phx.corporate-ir.net
I am not quite clear on the degree to which AHM is left holding the bag when one of these loans goes into delinquency.
Here's an article I found:
Bad-Loan Woes Hit American Home [Business Week]
Chalk up another victim of the subprime lending debacle. American Home Mortgage Investment Corp. (AHM) said after the market close on June 28 that it expects to post a net loss in the second quarter due to additional reserves it's had to set aside for bad loan repurchases. The shares plunged in NYSE trading June 29.
Driving the likely loss are the substantial charges for credit-related expenses that the real estate investment trust said it will take in the second quarter. These expenses have stemmed mostly from the 90-day "timely payment" warranty the company granted to buyers of its stated income loans with high loan-to-value ratios. American Home discontinued these high-risk loans in April.
The company said it will buy back delinquent loans with a portion of the proceeds from $125 million of 9.75% convertible trust preferred stock it has issued.
In the wake of the collapse in subprime lending, "the credit appetite of the secondary market has changed, so it's not surprising that a lot of these loans were kicked back to [American Home] by the secondary market," said Bose George, an analyst who covers the company at Keefe, Bruyette & Woods. Nor did the company's pre-announced loss astonish him, as he's had an underperform rating on the stock for a while.
American Home also withdrew its full-year 2007 earnings outlook of $3.25 to $3.75 a share, citing the anticipated second-quarter results and uncertain conditions in the mortgage industry. Delinquency-related charges contributed to the 47% drop in profit that the company reported in the first quarter, compared with the year before.
The Melville (N.Y.) company did reaffirm its quarterly dividend of 70 cents a share, saying that revenue from its portfolio, loan sales and servicing fees remained steady, partly due to higher demand for its loan pools, which has helped boost the price at which these pools trade. The company had previously cut its dividend from $1.12 in the first quarter.
In the first-quarter earnings release, Chief Executive Michael Strauss said that 87% of the company's delinquency-related charges came from loans held for sale, not its current loan portfolio.
While positive, there's little consolation in that, given that the gain-on-sale income American Home gets from selling into the secondary market accounts for roughly 75% of its total revenues, said George at KBW.
"If the secondary market conditions are weak for an extended period of time, this company will continue to struggle. What's on the balance sheet is not sufficient to alleviate the problems on the secondary market side," he said.
He predicted the secondary markets would remain cautious on credit largely due to the slowdown in home price appreciation. "If that's the case, it will be harder for people to refinance, that will hurt the credit market, and it all translates into a lower risk appetite, which hurts the mortgage banks, especially the ones doing products with higher levels of credit risk."
American Home's discontinuation of the high-LTV loans in April should help lessen credit issues in the second half of this year, A.G. Edwards & Sons said in a research note on June 29. The company noted a 53% drop in repurchase claims for May and June from peak levels in April.
A.G. Edwards, which rates the stock a hold, lowered its projection for gain-on-sale margins for the next three quarters, saying that although credit losses should peak in the second quarter, they "will still have a significant impact in the third quarter and ease in the fourth quarter." Gain-on-sale margins will also be compressed by further problems in the mortgage industry and a shift in American Home's portfolio from higher-margin Adjustable Rate Mortgage loans to lower-margin fixed-rate ones, the note said.
American Home shares were trading 13% lower at $18.02 on June 29.
A.G. Edwards advised investors not to buy on weakness, saying it lacked a clear view on the timing or severity of possible further credit write-downs and the potential for loan or margin weakness in the second half of the year.
The firm cut its earnings forecast for fiscal 2007 to $1.67 from $3.50 a share and pared its 2008 estimate to $2.89 from $4.50 a share, but it said it still sees the company's longer-term prospects as favorable.
Standard & Poor's reconfirmed its buy rating on American Home shares, noting the decline in new repurchase claims in the latter part of the second quarter and saying "the company's tightened underwriting standards should aid in the reduction of reserve requirements." S&P cut its full-year earnings estimate to $2.24 from $3.00 and kept its 12-month target price at $22, which equates to a discounted book value from historical levels. (Standard & Poor's, like BusinessWeek, is owned by McGraw-Hill Companies [MHP].)
George doesn't own shares of American Home, but Keefe, Bruyette & Woods expects to receive compensation for investment banking from the company within the next three months. A.G. Edwards doesn't do investment banking with the company.
businessweek.com
Sam |
