Three recent mortgage and banking acquisitions were overshadowed by ongoing mortgage related losses, debt rating downgrades and an involuntary bankruptcy for a former subprime lender. Meanwhile, the state of Ohio is suing Freddie Mac for allegedly hiding its subprime exposure from investors.
E*Trade Financial Corp. reported a fourth quarter net loss of $1.7 billion, which was deeply impacted by the $2.2 billion pre-tax loss on the previously announced sale to Citadel Investment Group of a $3 billion asset-backed securities portfolio that contained collateralized debt obligations and second lien securities.
Full-year 2007 earnings, a negative $1.4 billion and way off net income of $629 million the previous year, declined significantly due to “rapidly deteriorating loan performance, a lack of liquidity in the secondary mortgage market, declining home prices and tighter mortgage lending standards,” the New York-based company said. The year’s results included an increased provision expense of $640 million and asset losses and impairments of nearly $2.5 billion, including the sale to Citadel through which it purged its most distressed asset class, eliminating a source of earnings volatility. It ended the year with $508 million in loan loss reserves.
But E*Trade said it expects a profitable 2008 through a turnaround plan in which it will cut costs by $360 million, reinvest $85 million in retail business growth initiatives, and engage in a combination of asset sales and potential capital market transactions. It anticipates ending the year with almost $1 billion in excess capital at its banking business.
Fitch Ratings announced it lowered the Long-term Issuer Default Ratings of IndyMac Bancorp Inc. to BB from BBB- and has a negative outlook on the rating. Approximately $440 million in debt is involved in Fitch’s rating action, which reflects the expectation that IndyMac’ near-term return to profitability will be challenging as changes in mortgage industry dynamics, once viewed as temporary, become more permanent. IndyMac’s mono-line focus and diminished competitive advantage has Fitch believing credit risk is more speculative in nature.
Fitch also downgraded BankUnited Financial Corp.’s Long-term Issuer Default Rating to ‘BB’ from ‘BB+’ and Senior debt to ‘BB’ from ‘BB+’. In addition, the ratings agency revised the Rating Outlook to Negative from Stable. The negative actions reflect rapid credit deterioration particularly evident in the sharp rise in non-performing assets. Bank United’s $25.5 million fourth quarter loss was mainly the result of a significant rise in provisions and continued margin compression.
NovaStar Home Mortgage Inc. was hit with an involuntary petition for Chapter 7 bankruptcy protection for allegedly failing to pay a $48.9 million judgement. American Interbanc Mortgage LLC filed the petition Wednesday in the U.S. Bankruptcy Court of the Western District of Missouri.
American Interbank had originally filed a lawsuit against the NovaStar Financial Inc. subsidiary and two other companies in March 2002, accusing them of using “bait and switch tactics” in advertising their rates on Monstermoving.com and Bankrate.com.
American Interbank won a $46.1 million judgement against NovaStar Home and the two mortgage companies last June, NovaStar Financial said in its third quarter earnings filing. NovaStar Home, which recorded a liability of $47.2 million as of Sept. 30, 2007, for the judgement and its accruing interest, has appealed an August decision that denied the verdict to be reduced.
NovaStar Home “has a negative net worth and no ability to pay the judgment,” the filing read. NovaStar Financial does not believe American Interbank has a legal basis to hold it responsible for the subsidiary’s judgment but “may be forced to consider bankruptcy” if American Interbank succeeds in such pursuit.
Freddie Mac is being accused of causing up to $27.2 million in losses to the Ohio Public Employees Retirement Fund by failing to disclose it was heavily investing in subprime mortgages but not protecting itself from the “billion-dollar” risks it incurred, Attorney General Marc Dann announced. The alleged false public statements and denials of its subprime exposure artificially inflated the company’s publicly traded common stock.
Dann filed the securities fraud suit in an Ohio court on behalf of the fund and all other Freddie common stock purchasers from Aug. 1, 2006, through Nov. 23, 2007. In addition to Freddie and its top officers, the litigation seeks to hold the company’s committee directors personally responsible for their recklessness and secrecy about the investments and resulting losses, according to the announcement.
The Ohio fund, which previously won a $410 million settlement as lead plaintiff in an earlier case against Freddie, is seeking to be the lead plaintiff in this case and another similar case recently filed in federal court in New York, Dann said.
In France, banking giant Societe General revealed it will take a $7.2 billion charge resulting from one of its traders’ fraudulent transactions involving European index futures that he was not authorized to make. Inside sources of Societe reportedly identified the trader as Jerome Kerviel. The employee, who had worked for the company since 2000, confessed to trading futures through a phony company he created. The fraud is the largest-ever by an individual in the securities business, CNN reported.
As a result of the fraud, the French bank is selling $8 billion to raise capital. Plus, Societe General will increase writedowns by about $3 billion due to exposure to U.S. subprime mortgages, CNN said.
New York Mortgage Trust Inc. said it completed the previously announced $20 million convertible preferred stock transaction with JMP Group Inc. and certain of its affiliates. The proceeds will be used to purchase agency mortgage-backed securities.
Bank of America Corp. raised $12 billion through a public offering of depositary securities and preferred shares, selling $6 billion of each. Strong investor interest pushed the total raised well above the original $6 billion offering. The net proceeds will be used for general corporate purposes, .the Charlotte, N.C.-based bank said Thursday.
Alabama National BanCorporation said on Thursday that its stockholders approved for the company to be acquired by RBC Centura Banks Inc. RBC is to issue cash or common stock worth $80 for each Alabama National common stock, though the agreement calls for the deal to be half cash and half stock. The merger is expected to be completed during RBC’s fiscal second quarter from Feb. 1 through April 30, a news release stated.
American General Finance has agreed to pay $1.5 billion for a significant portion of the mortgage and consumer loan portfolio of Equity One, the U.S. consumer finance operations of Popular Financial Holdings, Puerto Rico-based parent Popular Inc. announced. The deal is expected to close this quarter.
American General will consider keeping an unspecified number of Equity One’s employees and branch locations. Equity One will close any remaining branches and give employees who are not drafted a transitional severance package, professional counseling, outplacement and support. Charges related to layoffs will be $8.1 million of the overall $19.5 hit Popular expects to take mostly this quarter for the restructuring plan.
Popular said the sale will allow it to further focus on its core banking franchise, while the Indiana-based subsidiary of American International Group Inc. announced the purchase allows it “to take advantage of loan growth opportunities that fit our strategic objectives and our underwriting and return requirements.”
Michigan-based Rock Holdings Inc., the parent company of Quicken Loans Inc., announced the acquisition of California-headquartered One Reverse Mortgage. Quicken and RockBridge Equity Parnters purchased the provider of reverse loans insured by the Federal Housing Administration.
“The current negative environment is very favorable for companies like ours which are positioned to seize the opportunities it creates,” said Quicken Loans founder and Chairman Dan Gilbert in the announcement.
