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Earnings Upset Industry

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April 30, 2007


photo of Coco Salazar

As mortgage mergers and acquisitions maintained, deteriorating mortgage earnings overshadowed the latest corporate activity. Meanwhile, IndyMac Bancorp Inc. warned that increased competition will hurt earnings at its reverse mortgage subsidiary.

Ohio Savings Bank adopted the name of subsidiary AmTrust Bank effective April 23.

Citizens Republic Bancorp Chief Executive William R. Hartman will assume the role of president being vacated by Dana M. Cluckey on May 31. Cluckey indicated that with the process of integrating Citizens and Republic Bancorp Inc. being on track, it is "a good time" to explore new opportunities.

Quantum Servicing Corp. has been added to Standard & Poor's Select Servicer List, a move Quantum parent Clayton Holdings Inc said is significant "towards expanding our special servicing business to mortgage-backed security transactions and to diversifying our revenue sources."

Moody's Investors Service said it found that only 10 of 21 reporting homebuilders had positive cash flows over a 12-month period at the end of 2006, potentially face ratings decreases and difficulty complying with their indenture covenants in the coming months.

"Homebuilders are continuing to cope with stubbornly high inventories amid continued decimation of earnings," Moody's said. "Consequently, more and more issuers are increasingly likely to face challenges in complying with their current interest coverage covenants and to require waivers and covenant relief from their banking groups."

NovaStar Financial Inc. said that it closed on the previously announced financing facilities with Wachovia Investment Markets LLC and Wachovia Capital Markets LLC to provide up to $100 million in additional liquidity. The 1-year-term financing is part of NovaStar's efforts to enhance liquidity and flexibility in light of the current credit environment.

Friedman, Billings, Ramsey Group Inc. reported $124.2 million in subprime losses during the first quarter -- giving the firm an overall first-quarter loss of $185.9 million. Declining market conditions, including a "series of distressed sales and bankruptcies," led to credit deterioration and devalued mortgage debt at the real estate investment trust.

At Countrywide Financial Corp., pretax earnings plunged to $100 in the first quarter from $453 million in the fourth quarter 2006. The earnings were "impacted by charges relating to our subprime activities as well as increases to our loss reserves and related asset valuation adjustments stemming from higher delinquencies and softer housing markets."

BB&T is closer to acquiring Coastal Financial Corp.'s, as South Carolina-based Coastal's shareholders approved the merger expected to close on or around Tuesday, according to a press release.

East West Bancorp Inc. announced that it will pay $142.6 million to buy Desert Community Bank, which will retain its name and provide East with a wider California footprint. The deal is expected to be completed by the third quarter.

West End Special Opportunity Fund LP agreed to purchase $2 million in shares of specialty mortgage banker Geneva Financial Corp. An initial April 12 closing of the transaction will be followed by two more transactions on May 1 and July 31. The relationship will help Geneva with resources to expand core business operations, diversify its product line, and more efficiently extract opportunities existing in the current mortgage environment.

OceanFirst Financial Corp., which had a $5.4 million first quarter loss due to its subprime lending activities, is "negotiating a sale or rapid shutdown" of its mortgage subsidiary, Columbia Home Loans LLC, according to a conference call. Early payment defaults and investor repurchase requests for subprime loans contributed to the suspension of subprime originations at Columbia in March and the company has also "severely curtailed" underwriting of stated income Alt-A loans, according to the call.

"There is no denying the fact that our subprime lending activities were too aggressive," OceanFirst said.

Impacted by its wholesale and conduit channels, IndyMac reported first quarter net income of $60 million from its consumer mortgage banking business, down 22 percent from the fourth quarter. The company expects subsidiary Financial Freedom's first quarter earnings of $28 million to plunge to $12 million this quarter before picking up in the second half because "new entrants into the reverse mortgage business are exerting competitive pressures, reducing revenue margins to more normal levels."

Bank of America recently entered the reverse mortgage market with its acquisition of Seattle Mortgage Co. Wells Fargo Home Mortgage, the self-proclaimed largest retail originator of reverse loans, recently announced it cut the margin it charges on its variable rate home equity conversion mortgage.

Coco Salazar is an associate editor and staff writer for MortgageDaily.com.

e-mail: [email protected]

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