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Volatility Looms Over Mortgage Market

Recent mortgage related mergers, acquisitions and other corporate activity

August 10, 2007

By COCO SALAZAR


photo of Coco Salazar

Beleaguered mortgage lenders continue to struggle with liquidity, litigation and mergers while hedge funds internationally continue to be stung by U.S. subprime investments. One federal agency is stepping up scrutiny of reported subprime exposure by investment banking houses while another is stepping in to provide liquidity.

At BNP Paribas Investment Partners, however, three funds have been temporarily suspended: Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. Citing that the "complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP said it is currently unable to calculate a reliable net asset value for the three funds and will provide additional information to the funds' investors next month.

The SEC is investigating Wall street brokers to see if they are using consistent methods to calculate the value of subprime mortgage assets in their own inventory and those held by hedge funds and other clients, the Wall Street Journal reported. The SEC is concerned that brokers may be hiding losses by not marking down assets in their inventory as aggressively as assets held by clients. Investigations are expected to include the top five investment firms, including Goldman Sachs Group Inc and Merrill Lynch & Co.

HomeBanc Corp., which recently sold its retail operations to Countrywide Financial Corp. due to "extraordinary difficulties" in the mortgage market, announced it filed a voluntary petition for relief under chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware today.

"HomeBanc believes that, under the protection of Chapter 11, it will have the time and opportunity that it needs to achieve the best possible value for the creditors and other constituencies of its assets and operations, and to effect an orderly wind down of the company," the announcement said.

Luminent Mortgage Capital Inc., which at the beginning of this week disclosed it was experiencing a significant increase in margin calls and looking at strategic alternatives to enhance its liquidity, is being sued by Brodsky & Smith LLC on behalf of investors who purchased Luminet stock between Oct. 10, 2006, and Monday, Brodsky announced today. The securities class action suit alleges Luminent artificially inflated its price by issuing a series of material misrepresentations to the market.

Brodsky's lawsuit follows Luminent's announcement Wednesday that it received notices of default from two repo lenders and that it was "continuing to vigorously explore all of its alternatives with respect to its sudden liquidity issues resulting from the unanticipated and extraordinary disruptions in the secondary mortgage and national real estate markets."

Prior to disclosure of the default notices, Rosen Law Firm announced it was investigating allegations that Luminent misrepresented its financial condition and was preparing a lawsuit for investors who bought securities from May 10, 2007, through Monday. Rosen noted that as late as July 30, Luminent had said it had "ample liquidity to manage its business."

Washington Mutual Inc. said liquidity in the secondary market for nonconforming loans has "diminished significantly" since the latter part of July, as subprime secondary volatility from the subprime secondary mortgage market throughout the year has spread, according a filing Thursday with the Securities and Exchange Commission.

"While these market conditions persist, the company's ability to raise liquidity through the sale of mortgage loans in the secondary market will be adversely affected," WaMu said, adding that it cannot anticipate the impact this will have on loan origination volumes and gain on sale results during the remainder of the year.

Delta Financial Corp. said on its Web site that it would postpone its earnings release and conference call, which was to be held Wednesday. In an SEC filing Thursday, the nonconforming lender said it would file its Form 10-Q for the second quarter next week because during the completion of the filing it began to negotiate "one or more arrangements to add new sources of capital, and the results of these negotiations would directly and materially impact the disclosures and financial condition of the company."

Delta said second quarter income was $777,000, sinking from $4.9 million in the previous quarter. Net income for the first half of the year was adversely affected by prepayments being made slower than anticipated, an increase of $10.5 million in loan loss provisions, and a decrease of $5.5 million in non-interest income related to loan sales to investors.

This morning, the Federal Reserve announced it is "providing liquidity to facilitate the orderly functioning of financial markets." Noting that the current environment may cause depository institutions to experience unusual funding needs because of dislocations in money and credit markets, the Fed said it will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to 5.25 percent.

As for merger-related activity, the Federal Home Loan Banks of Chicago and Dallas announced that they are considering merging their business operations and are currently evaluating the benefits and feasibility of doing so.

Heritage Commerce Corp reported that second quarter net income decreased from a year earlier to $4.0 million, noting that much of its focus in the period was on completing the acquisition of Diablo Valley Bank on June 20 and preparing for a smooth integration of operations.

Meanwhile, reverse mortgage lender Vertical Lend said it expects to be acquired by KBC Financial Products at the end of the month. Vertical says it is the fifth largest lender of provider of Home Equity Conversion Mortgages and that KBC is a subsidiary of Belgian-based KBC Bank NV that specializes in equities and equity, credit and fund linked derivatives and structured credit products.

Some sunlight shone on Accredited Home Lenders Holding Co.

While disclosing last week it had doubts of its survival, today Accredited said it met one primary condition of a deal to be acquired by an affiliate of Loans Star Fund. The company received regulatory approvals from states representing over 95 percent of its 2006 loan production. The pending tender offer for Accredited's outstanding stock is scheduled to expire at midnight on Aug. 14.

PHH Corp. said it will hold a special meeting of stockholders on Sept. 26 at its Mt. Laurel, N.J. headquarters for the purpose of adopting the agreement to merge with General Electric Capital Corp.

PHH shareholder Pennant Capital Management LLC opposes the sale. The investment advisory firm issued a statement today indicating the mortgage business is undervalued in the deal and could be liquidated at a value of $35 per share based on management's forecast.


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

e-mail: [email protected]


Corporate Mortgage News
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Nonprime and Subprime News | Subprime Statistics
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hard money lending. Home-equity loans and home-equity lines of credit.


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Mortgage industry lawsuit news and mortgage litigation coverage. Stories about legal settlements, judgments and mortgage class actions.


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