NYC Expands Countrywide Suit

New York City Comptroller William Thompson is suing Countrywide Financial, accusing the company of misleading its investors by “falsely representing that Countrywide has strict and selective underwriting and loan origination policies”. It was announced on Friday that the suit is being expanded, with additional company officers, directors, underwriters and accounting firms. Now that names like Grant Thornton and Citigroup are involved, this is getting serious, and even uglier than before.

It’s funny how every time anyone mentions Countrywide in an online article, there’s a burst of attention and a flurry of comments ranging from “I’m a former employee, they deserve whatever comes their way” to “I work at Countrywide, we’re all ethical agents”. I’m more inclined to believe the former, until that is proved untrue. And some of the latest news on Countrywide’s Mozilo: it seems he’s so fed up with the press commenting on his stock sales and retirement benefits, that he’s decided to forfeit $37.5 million in severance pay, but still keep the rest of the money he’s about to receive upon leaving Countrywide. Does this mean that he doesn’t think he deserves the money?

American Home Mortgage: nearly bankrupt?

In a news release issued yesterday, July 31, American Home Mortgage (AHM) announced that it is “experiencing a hindering of access to its traditional lending facilities” and will be unable to fund its lending obligations. The lender has paid “very significant” margin calls in recent weeks and “has substantial unpaid margin calls pending”. AHM has retained Lazard, the same company that served now-bankrupt New Century, to assist in evaluating “strategic options”, including liquidation of its assets.

Shares dropped more than 90% immediately after trading was resumed, to close at $1.04. According to analysts, a bankruptcy or major restructuring is very likely because AHM can not function without its financing. Shareholders will probably be left with nothing. The whole story looks a lot like the subprime lender meltdown, only that now it’s Alt-A.

Lawsuits seeking class action status are already being filed against AHM. Charges include failing to disclose substantial information that affected its earnings and resulted in overstating its financial results.

Shares of other lenders were affected, too, with Countrywide down 3.8% to $28.17, Fremont General declining 11% to $5.77 and NovaStar losing 25% at $9.64.

American Home Mortgage: nearly bankrupt?

In a news release issued yesterday, July 31, American Home Mortgage (AHM) announced that it is “experiencing a hindering of access to its traditional lending facilities” and will be unable to fund its lending obligations. The lender has paid “very significant” margin calls in recent weeks and “has substantial unpaid margin calls pending”. AHM has retained Lazard, the same company that served now-bankrupt New Century, to assist in evaluating “strategic options”, including liquidation of its assets.

Shares dropped more than 90% immediately after trading was resumed, to close at $1.04. According to analysts, a bankruptcy or major restructuring is very likely because AHM can not function without its financing. Shareholders will probably be left with nothing. The whole story looks a lot like the subprime lender meltdown, only that now it’s Alt-A.

Lawsuits seeking class action status are already being filed against AHM. Charges include failing to disclose substantial information that affected its earnings and resulted in overstating its financial results.

Shares of other lenders were affected, too, with Countrywide down 3.8% to $28.17, Fremont General declining 11% to $5.77 and NovaStar losing 25% at $9.64.

NovaStar pays $5.1 million to settle class-action law suit

NovaStar, one of the subprime borrowers hardest hit by the current Real Estate market slowdown, has agreed to pay $5.1 million to settle a lawsuit accusing it of charging excessive interest rates to cover broker fees. The sum includes $3.3 million in payments to 1,600 class members and $1.8 million for legal fees.

As problems in the subprime sector started emerging, borrowers and investors began filing class-action lawsuits against subprime lenders, accusing them of various wrongdoings. Some law suits are already getting settled, and I guess this comes as a relief to many. NovaStar said it does not admit any liability, and decided to settle the case because it was an obstacle to a possible sale. Officials claim that the company has followed “standard practices in the mortgage industry that comply with the law and applicable regulations” – which doesn’t say much, since regulation has been quite loose on lending practices and many procedures that became standard within the industry were not in borrowers’ best interest.

Meanwhile, mortgage rates eased somewhat this week, but are still higher than earlier in the year. Interest on 30-year fixed rate mortgages averaged 6.69 this week, down from 6.74% a week ago. 15-year fixed-rate loans dropped to 6.37% from 6.43% last week, 5-year hybrid adjustable-rate mortgages were at 6.31%, down from 6.37%, while 1-year adjustable loans averaged 5.66%, compared to 5.75% a week earlier.

Class action against NovaStar

Various law firms are beginning to file lawsuits seeking class action status on behalf of NovaStar stockholders who’ve purchased stock between May 4, 2006 and February 20, 2007. The company is believed to have knowingly concealed the following facts: its projections were based on defective assumptions about loan delinquencies, because internal controls weren’t operating; its financial statements were misstated due to improper accounting practices which did not allow for loan losses; NovaStar would have to tighten its underwriting guidelines which would result in lower origination volumes and therefore lower earnings; the company could not guarantee it would maintain its taxable income and its Real Estate Investment Trust (REIT) status.

The company’s stock closed at $8.48 on Friday, according to the New York Stock Exchange website. Earlier in the week, its shares traded at $17.33. The press has named the NovaStar depreciating process a “free fall” and there’s reason enough: various investors say they suspected something wasn’t right long before the news came out and now anyone who still holds these stocks is trying to get rid of them.

On February 20th, the company announced it earned negative income in the fourth quarter of 2006, sending shares of subprime lenders on a rollercoaster ride downwards. It seems that stockholders in the subprime sector are starting to treat bad news on any company as an indicator of hardships in the entire industry, even though we’re often told that each company’s accounting policies and financial practices are different. Thus when a company goes down it drags other subprime lenders with it. This happened when New Century said it had overstated its earnings for 2006 due to accounting mistakes and it happened again last week after NovaStar reported financial loss in 2006. The free fall has so far caused several companies to lose half their value and I wonder, where is the bottom? Another lending company, Eagle First Mortgage, was shut down over the weekend, so how many more will have to collapse before the market is back on track? And how long is it going to take?

Meanwhile, the ABX.HE index, which tracks credit default swaps (CDS) on subprime mortgage-backed securities, fell to a record low of 69.39 on Friday, down from more than 90 earlier in February. As subprime lenders go bankrupt or report poor results, investors have begun to avoid purchasing these securities and indexes take a plunge.