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.
Tuesday, February 27, 2007
Monday, February 26, 2007
Mortgage rates slide again
30-year fixed-rate mortgage rates dropped to 6.22% this week, from 6.30% last week. This is the lowest level since mid-January, when it averaged 6.21%. According to analysts, the drop reflected a relative weakness in the real estate industry, illustrated by reports of slowing new home construction. Housing starts fell 14.3% in January to the lowest reading since 1997, sparking concerns that the declining housing market may have a serious impact on economic growth. The drop was in part due to large numbers of unsold inventories currently on the market.
15-year fixed rates also dropped this week, reaching 5.97%, compared to 6.03% last week. 5-year adjustable rates fell to 5.96% from 6.01 a week earlier. One-year ARMs dropped from 5.52% to 5.49%.
Lower mortgage rates will make new homes more affordable, so there’s hope this will help absorb the oversupply of unsold houses. But will low rates be around for long enough to really influence the market? This week’s drop is definitely caused by changing circumstances, and yet home prices have to drop further before balance is restored. When and how this is going to happen is not entirely clear, as increasing sales volumes tend to push home prices up as well, so if houses begin to sell faster again, sellers won’t be willing to cut prices.
15-year fixed rates also dropped this week, reaching 5.97%, compared to 6.03% last week. 5-year adjustable rates fell to 5.96% from 6.01 a week earlier. One-year ARMs dropped from 5.52% to 5.49%.
Lower mortgage rates will make new homes more affordable, so there’s hope this will help absorb the oversupply of unsold houses. But will low rates be around for long enough to really influence the market? This week’s drop is definitely caused by changing circumstances, and yet home prices have to drop further before balance is restored. When and how this is going to happen is not entirely clear, as increasing sales volumes tend to push home prices up as well, so if houses begin to sell faster again, sellers won’t be willing to cut prices.
Friday, February 23, 2007
Shares of subprime lenders tumble
On Wednesday, February 21st, a number of subprime lenders saw their shares tumble in response to news of financial instability at NovaStar, the 19th largest subprime lender. NovaStar stocks dropped 39% since the news came out, to reach $10.68, as shares of New Century Financial declined 7% to $17.45 and those of Countrywide Financial went down 2.4% to $40.66.
Stocks of nearly all subprime mortgage lenders have been falling sharply during the past few months, as a response to deteriorating market conditions, but they are not the only sign of trouble in subprime lending. Approximately 1 out of 10 sub-prime mortgages has defaulted by the end of 2006, and banks are forcing mortgage companies to repurchase the bad loans. Since a large percentage of mortgages originated in 2006 are either “stated income” (which means that borrowers don’t have to provide proof of their income) or “interest-only” (where borrowers can pay the interest alone for a certain initial period), the risk of delinquencies is incredibly high and investors are pulling their funds out of the subprime mortgage market.
Now that lenders are tightening their underwriting standards, origination numbers are slowing down, but so are loan purchases by banks. HSBC announced it would have to spend more than expected on loan repurchase, New Century reported 4th quarter loss and said it would have to restate its income for the previous 3 quarters due to accounting mistakes, Accredited and NovaStar posted loss in the 4th quarter as well. Countrywide is stronger financially but high numbers of delinquencies will affect its stability too.
This is yet another installment in the wave of bad news that flooded the subprime market since the end of 2006. As lenders adhere to higher standards, loan origination volumes drop but loan quality increases. Loan providers predicted a tough 2007, but for some it proved tougher than expected. Several dozen smaller lenders have closed down or been sold recently in the challenging market environment. LoanCity closed seven branches, leaving 5 still operating, due to a “softer market”. Wells Fargo is cutting 250 jobs at its
The current situation is a challenge for subprime lenders, but it will eventually lead to improvements in the industry sector altogether. As the housing market shrinks, so does the demand for mortgage loans and some companies find themselves with little or no work to do. By the end of the year, we’ll probably see stricter mortgage standards and fewer lenders still operating in the new market realities.
Thursday, February 22, 2007
NovaStar reports fourth-quarter loss
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.
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.
Wednesday, February 21, 2007
Freddie Mac among “Best corporate citizens”
Freddie Mac is listed among the 100 Best Corporate Citizens for 2006, a list compiled by Business Ethics magazine for the eighth time, and also published in CRO magazine for the first time. The 100 Best Citizens are selected out of approximately 1,100 publicly held U.S. companies included in the Russell 1000, S&P 500 and Domini 400 indices. The statistical analysis was designed by Sandra Waddock and Samuel Graves of Boston College. KLD Research & Analytics, an independent investment research firm in Boston, collects data on each company and assigns points for strengths and weaknesses in 8 categories: community, corporate governance, diversity, employee relations, environment, human rights, product and total return on investment (averaged over three years). Each category is given equal weight in the final scoring. Issues like environmental protection, human rights, and serving the community in both traditional and innovative ways are of special importance in compiling the list.
Freddie Mac ranks 28th, followed by Google Inc. (number 29) and 3M Co. (number 30). One of its rivals, Wells Fargo & Co., ranks way lower, landing at number 46. Corporate responsibility and serving the community are among Freddie Mac’s top priorities, one of its major aims being providing affordable housing and low-cost loans. It seems the company’s efforts are being recognized and appreciated.
The “100 Best Corporate Citizens” doesn’t list perfect companies. Many of the corporations in it are involved in various scandals and have their own problems, but by acting as “good citizens” and showing responsibility for the environment, their employees and the world as a whole, they distinguish themselves from their peers. High standards and embracing social issues have ranked Freddie Mac among the top 100.
Well, the list did not present many surprises, but it was quite interesting to find out who ended up in the top 10. Here is the link: http://www.thecro.com/files/100BestGatefold.pdf. With increasing challenges predicted for 2007, let’s hope Freddie Mac maintains high performance standards and responsible practices.
Freddie Mac ranks 28th, followed by Google Inc. (number 29) and 3M Co. (number 30). One of its rivals, Wells Fargo & Co., ranks way lower, landing at number 46. Corporate responsibility and serving the community are among Freddie Mac’s top priorities, one of its major aims being providing affordable housing and low-cost loans. It seems the company’s efforts are being recognized and appreciated.
The “100 Best Corporate Citizens” doesn’t list perfect companies. Many of the corporations in it are involved in various scandals and have their own problems, but by acting as “good citizens” and showing responsibility for the environment, their employees and the world as a whole, they distinguish themselves from their peers. High standards and embracing social issues have ranked Freddie Mac among the top 100.
Well, the list did not present many surprises, but it was quite interesting to find out who ended up in the top 10. Here is the link: http://www.thecro.com/files/100BestGatefold.pdf. With increasing challenges predicted for 2007, let’s hope Freddie Mac maintains high performance standards and responsible practices.
Tuesday, February 20, 2007
New Construction Fell 14% for January
According to a report issued by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD), new construction fell 14.3% in January, to levels 37.8% below January 2006 figures.
This news is not surprising, after reports of high unsold inventories indicated an oversupply of new houses that just don’t sell anymore. Last month, builders were refusing to start new projects and did everything possible to get rid of new houses, including cutting prices and offering various incentives to buyers. Large numbers of new homes remained unoccupied and many builders lost their jobs, so it’s natural that fewer new houses were constructed. Housing starts are expected to decrease in 2007, helping reduce the number of vacant homes waiting for buyers. As supply diminishes to match demand, the market will become more stable and predictable.
And while these numbers indicate positive trends for the Real Estate industry and the economy as a whole, they may be devastating on a company or individual level. Waiting for the storm to pass may not work for any home builder, because the market is expected to stabilize at below-boom levels, thus forcing some companies out and making others cut staff.
This news is not surprising, after reports of high unsold inventories indicated an oversupply of new houses that just don’t sell anymore. Last month, builders were refusing to start new projects and did everything possible to get rid of new houses, including cutting prices and offering various incentives to buyers. Large numbers of new homes remained unoccupied and many builders lost their jobs, so it’s natural that fewer new houses were constructed. Housing starts are expected to decrease in 2007, helping reduce the number of vacant homes waiting for buyers. As supply diminishes to match demand, the market will become more stable and predictable.
And while these numbers indicate positive trends for the Real Estate industry and the economy as a whole, they may be devastating on a company or individual level. Waiting for the storm to pass may not work for any home builder, because the market is expected to stabilize at below-boom levels, thus forcing some companies out and making others cut staff.
Friday, February 16, 2007
Slumping prices and climbing sales
A report issued Thursday, February 15, 2007, indicated a 2.7% slump in home prices in the fourth quarter of 2006 as compared to a year earlier. This marks a record year-over-year price drop in the housing market and comes after a 1.0% drop in the third quarter. This trend is the natural consequence of the current market situation and it is accelerating. I believe prices need to drop even more before the Real Estate business regains its balance, but these numbers already look like good news for consumers and economists – not for agents and home builders though.
Meanwhile, the National Association of Home Builders published its Housing Market index, indicating a 5% rise in builders’ confidence in market conditions since January, when it was 35%. Economists had predicted the index to remain unchanged, but it has reached its highest reading since it was 42 in June 2006. In September, it dropped to 30, a 15-year low. Nevertheless, if the Index remains below 50, this means that the number of builders who view the market as poor is higher than the number of builders who’re satisfied with the current situation.
Well, the index reflects housing dynamics as lower energy prices and mortgage rates, combined with growing employment and household income have caused an increased buying demand. Builders have been cutting prices and offering sales incentives for months, and these measures are finally yielding results, even though the loss incurred by slumping prices is often quite substantial. If unsold inventory is reduced significantly, this will help stabilize both the market and prices. For now, however, the environment is still challenging for all Real Estate and mortgage businesses.
Meanwhile, the National Association of Home Builders published its Housing Market index, indicating a 5% rise in builders’ confidence in market conditions since January, when it was 35%. Economists had predicted the index to remain unchanged, but it has reached its highest reading since it was 42 in June 2006. In September, it dropped to 30, a 15-year low. Nevertheless, if the Index remains below 50, this means that the number of builders who view the market as poor is higher than the number of builders who’re satisfied with the current situation.
Well, the index reflects housing dynamics as lower energy prices and mortgage rates, combined with growing employment and household income have caused an increased buying demand. Builders have been cutting prices and offering sales incentives for months, and these measures are finally yielding results, even though the loss incurred by slumping prices is often quite substantial. If unsold inventory is reduced significantly, this will help stabilize both the market and prices. For now, however, the environment is still challenging for all Real Estate and mortgage businesses.
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