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Strategies & Market Trends : Mr. Pink's Picks: selected event-driven value investments -- Ignore unavailable to you. Want to Upgrade?

To: Gary105 who wrote (3304)	9/27/1998 12:47:00 PM
From: Sir Auric Goldfinger	Read Replies (1) \| Respond to of 18998

When rates drop people refi and the I/O strips DISSAPEAR! If FP has booked them as income, they have to reverse them out when the underlying prinicpal is refied and the implied yeild vaporizes since the instrument is refinanced.

To: Gary105 who wrote (3304)	9/27/1998 8:54:00 PM
From: Larry Abrams	Respond to of 18998

Yes you are correct. As interest rates continue to fall, the loans previously originated or bought, and still not sold, rise in price Indeed, in reading FP 10-Qs, once they did take an unrealized gain (mark to market)on loans held for sale, but not yet securitized. But, what this does is reduce the eventual gain on sale when actually sold. I have never seen anyone else stoop to use this. The 10-Qs are vague when they did this..but not last quarter. My reading of FP 10-Qs, (while listening to my SF Giants lose on the radio), suggest that their accounting is no worse or better than a half dozen other subprime companies that rely on securitization, gain on sale, and slowly write off remaining o/i interest strips. The real issue will be the dramatic decline in EPS in the 3Q to be announced sometime in the 3rd or 4th week of October. They are facing a double whammy of both a decline in securitization and the percentage gain-on sale. Last quarter (2Q98), they secured 1.15B with a 4.1% rate gain -- resulting in income of 47M. Last year, (3Q97), the secured 676M with a whopping 11.8% gain -- resulting in income of 80M This quarter (3Q98), from what I've seen, they have only secured 690M, half of last quarter. Applying a 4.1% rate gain -- yields only an income of 24M. Thus, IMHO, EPS will be down sequentially. Last quarter, it was .65 diluted. It should be below that this quarter. How much lower..hard to say Still, Zacks has consensus EPS estimates of .78. No way IMHO, will FP get close to that without some new accounting. BTW, that could be resurrection of the mark-to-market of loans in transition (ie jumping to gun and not waiting til sale of taking the gains). Another thing I noticed is that they are making decent money just holding loans which means that the interest they are paying to borrow warehousing money is far less that the interest they are receiving from the subprime loans. This is rare. Most other companies lose money during the holding period. So, it looks like a race to sell before they have to announce in 4 weeks.