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Subprime Lender's Woes Hit FHLB System

DOJ investigation of American Business Financial hurts cash flow

October 3, 2003


The financial woes of Philadelphia subprime lender have had a ripple effect that are now causing problems for the Federal Home Loan Bank of New York.

American Business Financial Services, a subprime lender active in the manufactured housing market, disclosed in a Securities and Exchange Commission filing last week it must borrow $450 million to continue making loans. The company said it has had cash flow problems since June, when a potential investor was scared away by questions the U.S. Justice Department has raised about its lending practices concerning the collection of delinquent loans.

The U.S. Attorney's Office in Philadelphia subpoenaed records as part of the civil probe, the company said. Following that, the investor walked away from negotiations to sell securities backed by the American Business Financial Services loans.

Without an infusion of cash the company said it will have difficulty making debt payments.

Also last week the company reported a third quarter loss of $34.1 million, or $11.68 a share.

The Federal Home Loan Bank of New York became intertwined in the saga last week when it revealed it lost $183 million on the sale of $1.033 billion in uninsured bonds "collateralized by manufactured housing receivables" that had been downgraded from 'AAA', according to a Sept. 24th letter from bank President Alfred A. DelliBovi to its shareholders.

No other information about the ratings action, including the agency making the downgrade, was revealed in the letter.

The bank also refused to comment on its portfolio but several published reports indicated the bonds were backed by American Business Financial Services. The company did not return a phone call to comment.

"After a review of the manufactured housing portfolio, bank management determined that all of the uninsured bonds demonstrated deterioration in credit quality," DelliBovi wrote to shareholders. "To ensure that there would be no further deterioration, the bank has now sold this portfolio and has no uninsured exposure to the manufactured housing sector."

The consequences for the bank were immediate.

DelliBovi announced in his letter that because of the loss on the bonds the bank would not pay a dividend in October.

And last week Standard & Poor's Ratings Services (S&P) downgraded its long-term counterparty credit rating on the bank from 'AAA' to 'AA+', according to a written announcement from the ratings agency.

The bank's short-term rating was unchanged at 'A-1+' but S&P revised its outlook to stable from negative.

"The lowering of the rating reflects the recently announced sale of approximately $1 billion of securities that were collateralized by manufactured housing receivables and the associated loss taken by the sale from these securities," S&P said in its rating announcement.

"While the bank has now disposed of these securities ... the (bank's) retained earnings were cute more than half, and a significant quarterly loss will be recognized," S&P credit analyst Jonathan Ukeiley said in the statement.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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