On Tuesday, February 20, NovaStar, a residential lender and mortgage real estate investment trust, announced loss of $14.4 million or 39 cents per share in the last quarter of 2006. A year earlier, the company reported earnings of $26.4 million, or 84 cents a share. In after-hour electronic trading NovaStar’s shares dropped 33% to $11.81.
Earnings for 2006 were $66.3 million, a remarkable 50% drop from $132.5 in 2005. Loan origination was up 20% in the fourth quarter of 2006, and 21% higher than 2005 levels for the entire year. NovaStar specializes in subprime mortgages and, as default rates increase, it is forced to repurchase the bad loans it sold to banks earlier. This type of problem is increasingly affecting subprime lenders, who loosened their underwriting guidelines in 2006, allowing the issuing of high-risk loans. Now that borrowers are defaulting, mortgage companies are forced to buy those loans back, suffering further loss and reducing earnings estimates.
So is NovaStar the next New Century? According to Scott Hartman, Chief Executive Officer at NovaStar, probably not. Even though the repurchase requests were at record levels in the fourth quarter of 2006, the company believes its cash and available liquidity of $154 million will cover the risk for all loans sold to date. To ensure better results in 2007, the company is tightening its underwriting guidelines, enhancing the appraisal review process and avoiding loans that carry “unacceptable levels of risk”
Nevertheless, next year’s dividend could fall to $4 from $5.60 in 2006. According to company officials, there may be little to no taxable income from 2007 through 2011. The management is currently evaluating whether it is in shareholders’ best interest to abandon the company’s REIT (real estate investment trust) status, given the restrictions it imposes on the company’s operations. For 2007, NovaStar believes it will meet the REIT distribution requirements of distributing at least 90% of undistributed 2006 taxable income.
This news may be a bitter pill to swallow for NovaStar investors, but it is not as bitter as the one New Century shareholders got. It seems the end of subprime lending, or at least a significant contraction, is near.
Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts
Thursday, February 22, 2007
Thursday, February 15, 2007
Lenders to emphasize mortgage quality
Fremont General corp., the seventh-largest subprime mortgage lender in 2006, announced it would no longer provide the so-called “piggyback” mortgages which usually cover some 20% of a home’s cost and are added as second lien to the original mortgage. They have been widely used as a means of avoiding Private Mortgage Insurance and buying property without making a down payment. The decision was announced to mortgage brokers in an e-mail earlier this week.
If collateral is sold, lenders who provide “piggyback” mortgages receive any of the proceeds only if the property sells for more than the balance on the original mortgage. With the current market’s low demand and falling prices, they can seldom hope to regain their money. In many cases, borrowers who finance 100% of the home’s value with loans, walk away from their homes, often leaving lenders with properties that are worth less than the mortgage amount.
Lenders are tightening their standards and denying credit to borrowers with weak reports. They’re introducing stricter underwriting processes, demanding more proof of income and at least a minimal down payment. Accredited Home Owners said it will no loner provide some of the riskier types of loans and announced that incentive plans for its sales staff will from now on focus on loan quality, rather than volume.
High default levels have led to bankruptcies among lenders, who’ve had to buy back their bad loans from the financial institutions these loans are usually sold to. Accredited Home Owners has repurchased 1% of the loans it sold in 2006, up from 0.83% in 2005 and 0.64% in 2004, and hopes the repurchase activity will decline later in 2007.
Shares of various subprime lenders plunged late last week after some reports of financial loss in 2006 were issued, but many marked a slight increase on Wednesday.
What this all means is, they’re finally realizing exactly how risky those loans are, something experts have been talking about all along. When consumers with less than stellar credit are allowed to borrow 80% and more of their home’s worth without providing any proof of their income, who’s to guarantee that the loan will be repaid? Especially in a market where prices are artificially raised by speculator activity, it’s clear that those “affordable” loans can turn and bite their own originators – which they are doing now.
They kept “educating” consumers on how to borrow more without making down payments or paying PMI by using the so-called “piggyback” loans and “interest-only” mortgages and now they’ve decided the risk is too high and they can’t handle the delinquencies. I’d ask why anyone didn’t warn those people before it was too late. And what were banks thinking when they were lending their money to consumers who clearly were unable to repay these loans and preferred not to worry about it until they were forced to. It seems the money lenders earned on interest and fees on those loans wasn’t enough to cover the losses incurred by depreciation. Well, it seems that the “big players” will survive current challenges, but numerous smaller companies have already left the market.
Let’s hope that healthier lending policies will help stabilize the market, even though it’s hard to find out how exactly that’s going to happen, since housing will become even less affordable for subprime buyers, and if those 10-17% leave the market, we’ll have even lower demand, further decreasing prices and unsold new homes.
If collateral is sold, lenders who provide “piggyback” mortgages receive any of the proceeds only if the property sells for more than the balance on the original mortgage. With the current market’s low demand and falling prices, they can seldom hope to regain their money. In many cases, borrowers who finance 100% of the home’s value with loans, walk away from their homes, often leaving lenders with properties that are worth less than the mortgage amount.
Lenders are tightening their standards and denying credit to borrowers with weak reports. They’re introducing stricter underwriting processes, demanding more proof of income and at least a minimal down payment. Accredited Home Owners said it will no loner provide some of the riskier types of loans and announced that incentive plans for its sales staff will from now on focus on loan quality, rather than volume.
High default levels have led to bankruptcies among lenders, who’ve had to buy back their bad loans from the financial institutions these loans are usually sold to. Accredited Home Owners has repurchased 1% of the loans it sold in 2006, up from 0.83% in 2005 and 0.64% in 2004, and hopes the repurchase activity will decline later in 2007.
Shares of various subprime lenders plunged late last week after some reports of financial loss in 2006 were issued, but many marked a slight increase on Wednesday.
What this all means is, they’re finally realizing exactly how risky those loans are, something experts have been talking about all along. When consumers with less than stellar credit are allowed to borrow 80% and more of their home’s worth without providing any proof of their income, who’s to guarantee that the loan will be repaid? Especially in a market where prices are artificially raised by speculator activity, it’s clear that those “affordable” loans can turn and bite their own originators – which they are doing now.
They kept “educating” consumers on how to borrow more without making down payments or paying PMI by using the so-called “piggyback” loans and “interest-only” mortgages and now they’ve decided the risk is too high and they can’t handle the delinquencies. I’d ask why anyone didn’t warn those people before it was too late. And what were banks thinking when they were lending their money to consumers who clearly were unable to repay these loans and preferred not to worry about it until they were forced to. It seems the money lenders earned on interest and fees on those loans wasn’t enough to cover the losses incurred by depreciation. Well, it seems that the “big players” will survive current challenges, but numerous smaller companies have already left the market.
Let’s hope that healthier lending policies will help stabilize the market, even though it’s hard to find out how exactly that’s going to happen, since housing will become even less affordable for subprime buyers, and if those 10-17% leave the market, we’ll have even lower demand, further decreasing prices and unsold new homes.
Friday, February 2, 2007
Mortgage rates move higher
Following recent financial reports indicating steady economy growth, the rates on 30-year fixed mortgages rose to 6.34%, the highest level since October 2006. Freddie Mac reported that the rates on other types of mortgages also increased, the 15-year fixed-rate mortgage reaching 6.06% and the one-year ARMs 5.54%.
The 30-year fixed rate is nearing the October 2006 levels, when it was at 6.40% in the week ending Oct. 26th. The rise occurs after reports of steady financial growth were issued earlier this week. The economic results of the last quarter of 2006 were better than expected and economists hope this will influence the housing market which is slowly beginning to stabilize.
Surprisingly, delinquencies are becoming more frequent in spite of a relatively strong economy. Mortgage companies are beginning to take measures to prevent serious problems. They’re warning their customers of upcoming rate adjustments and calling borrowers within days after a missed payment. Banks provide information and assistance in dealing with mortgage payments and even allow some borrowers to refinance their ARMs into a different loan at no cost. According to Mark Zandi, chief economist at Moody’s Economy.com, the increased levels of delinquencies may be due to a weaker housing market and the widespread use of adjustable-rate mortgages, which are now beginning to adjust.
To avoid foreclosure costs, banks allow their clients to sell their properties for less than the due amount and forgive the remaining debt. This method is called a short sale, and helps borrowers avoid having a foreclosure on their credit reports.
A group of major lenders are planning a national advertising campaign, beginning this spring, which shall promote a toll-free number (888-995-HOPE) for mortgage and homeownership counseling.
The 30-year fixed rate is nearing the October 2006 levels, when it was at 6.40% in the week ending Oct. 26th. The rise occurs after reports of steady financial growth were issued earlier this week. The economic results of the last quarter of 2006 were better than expected and economists hope this will influence the housing market which is slowly beginning to stabilize.
Surprisingly, delinquencies are becoming more frequent in spite of a relatively strong economy. Mortgage companies are beginning to take measures to prevent serious problems. They’re warning their customers of upcoming rate adjustments and calling borrowers within days after a missed payment. Banks provide information and assistance in dealing with mortgage payments and even allow some borrowers to refinance their ARMs into a different loan at no cost. According to Mark Zandi, chief economist at Moody’s Economy.com, the increased levels of delinquencies may be due to a weaker housing market and the widespread use of adjustable-rate mortgages, which are now beginning to adjust.
To avoid foreclosure costs, banks allow their clients to sell their properties for less than the due amount and forgive the remaining debt. This method is called a short sale, and helps borrowers avoid having a foreclosure on their credit reports.
A group of major lenders are planning a national advertising campaign, beginning this spring, which shall promote a toll-free number (888-995-HOPE) for mortgage and homeownership counseling.
Thursday, January 25, 2007
The Fed to meet at the end of January
With the Fed meeting on Jan 30-31st, next week may prove to be an interesting time for investors and mortgage brokers. The last Fed meeting in December 2006 brought no rate adjustment, but the policy statement implied a possibility for further increase. Nevertheless, economists deem hikes unlikely, after four consecutive meetings since August 2006 without a rate change. Predictions are that the rate will remain unchanged after the meeting yet again, and a cut is possible later in 2007.
The mortgage and sales data to be received until the end of this week will be very important, as it will outline the current direction of the market, which shows some signs of decline in activity. This may or may not affect the overall picture but it may influence the outcome of the meeting.
In the meantime, on Tuesday, January 30, 2007, Patricia Cook, Freddie Mac’s executive vice president of investments and capital markets, will hold a speech at the Citigroup 2007 Financial Services Conference in New York City.
The speech will be broadcasted live through a link on Freddie Mac’s webpage http://www.freddiemac.com/investors. The archive will be up early on January 31st and available until March 1st, 2007.
The mortgage and sales data to be received until the end of this week will be very important, as it will outline the current direction of the market, which shows some signs of decline in activity. This may or may not affect the overall picture but it may influence the outcome of the meeting.
In the meantime, on Tuesday, January 30, 2007, Patricia Cook, Freddie Mac’s executive vice president of investments and capital markets, will hold a speech at the Citigroup 2007 Financial Services Conference in New York City.
The speech will be broadcasted live through a link on Freddie Mac’s webpage http://www.freddiemac.com/investors. The archive will be up early on January 31st and available until March 1st, 2007.
Wednesday, January 24, 2007
After the real estate market surge, new rates arrive.
According to Freddie Mac, a leading mortgage agency, the interest rates have risen slightly, after the increased sales and mortgage activity in the first 2 weeks of January.
With home prices and fixed-rate mortgages at near-record lows, the real estate environment benefits home buyers. Refinancing activity has been on the rise as well, with consumers changing from adjustable to fixed rate mortgages and consolidating debt after the holidays. Now, the market reacts with the 30-year fixed-rate mortgages, 15-year mortgages and hybrid ARMs raising a fraction as compared to the previous week.
The increased home buying activity is in part due to high employment numbers and low prices. Contrary to expectations, purchasing activity started going down during the second week of 2007, after the rise in the beginning of January. Home prices are likely to rise soon, with the spring home buying season approaching and the market waking up after last year’s lows.
The rising trend for ARMs may continue in 2007, making fixed-rate mortgages even more attractive for borrowers and stimulating refinancing. However, some researchers predict cuts after last year’s consecutive hikes, so ARMs may yet offer surprises.
With home prices and fixed-rate mortgages at near-record lows, the real estate environment benefits home buyers. Refinancing activity has been on the rise as well, with consumers changing from adjustable to fixed rate mortgages and consolidating debt after the holidays. Now, the market reacts with the 30-year fixed-rate mortgages, 15-year mortgages and hybrid ARMs raising a fraction as compared to the previous week.
The increased home buying activity is in part due to high employment numbers and low prices. Contrary to expectations, purchasing activity started going down during the second week of 2007, after the rise in the beginning of January. Home prices are likely to rise soon, with the spring home buying season approaching and the market waking up after last year’s lows.
The rising trend for ARMs may continue in 2007, making fixed-rate mortgages even more attractive for borrowers and stimulating refinancing. However, some researchers predict cuts after last year’s consecutive hikes, so ARMs may yet offer surprises.
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