Impac Mortgage Holdings Inc. warned stockholder equity has been wiped out, while Franklin Credit Management Corp. has halted operations. Meanwhile, international fallout from the U.S. subprime crisis continued to mount.
Huntington Bancshares Inc. said Thursday it expects a net loss in the fourth quarter because of a projected after-tax charge of up to $300 million to boost allowance for loan and lease losses stemming from its relationship with Franklin. Huntington became the lead lender of Franklin through its acquisition of Sky Financial Group Inc. on July 1, with $1.5 billion in loans outstanding on Sept. 30, 2007.
While the loans to Franklin are current and have not experienced charge-offs, they are affected by Franklin’s disclosure Wednesday it delayed filing its operating results for the third quarter and first nine months of 2007 because it expects to see a substantial increase in loan loss provisions for the quarter on its portfolio of acquired loans — particularly second-lien mortgage loans acquired in 2005 and 2006.
Third quarter results are expected to be filed before yearend, but the delay has resulted in Huntington suspending funding for Franklin’s new loan originations and acquisitions and it will not be obligated to resume funding after the review is completed. Huntington also agreed to waive a breach in Franklin’s debt covenants until Dec. 31.
The surprise $300 million charge led Fitch Ratings to announce downgrades on Huntington’s Issuer Default Rating to A- from A. and Individual Rating to B/C from B. The ratings additionally remain on review for potential further downgrades. Fitch noted Franklin is a mortgage servicing company with a niche in acquiring scratch and dent loans.
Fitch noted Huntington has been prudent in assessing the damage, though “there remains some room for further deterioration from this portfolio.”
Impac announced today it will be late filing its third quarter 10-Q with the Securities and Exchange Commission because more time is needed to assess the impact from recently discontinued warehouse lending operations, commercial operations and nonprime originations. It also warned of a greater third quarter loss, though it cannot “provide a reasonable estimate” at this point.
“The company expects to significantly add to its loan loss provisions primarily due to increased delinquencies in our long term investment portfolio and increased loss severities related to the sale and liquidation of real estate owned,” Chairman and Chief Executive Officer Joseph R. Tomkinson said in the statement. “The company anticipates to report a stockholders deficit as of September 30, 2007.”
Tomkinson explained that the deficit was a result of GAAP requirements to record a negative equity investment in certain trusts even though it “cannot ultimately lose more than its original net investment in each trust.” Its planned adoption of FAS 159 on Jan. 1, 2008, will reportedly eliminate the need to report such negative equity.
Barclays announced Thursday that it would write down by nearly $2.7 billion the value of notes Barclays Capital issued to reflect the impact of rating agency downgrades on collateralized debt obligations and the subsequent market downturn. Barclays said its involvement in the U.S. subprime sector comprises liquidity facilities to CDOs and other structures, now held as asset-backed securities CDO Super Senior exposure and other exposures. Over $1 billion of the write downs are for the third quarter and the other $1.6 billion are for October. The British bank noted its net income for the ten months ended Oct. 31 exceeds record net income of the same prior year period.
Sumitomo Mitsui Financial Group Inc. of Japan announced its exposure to U.S. subprime mortgages was around 95 billion yen (around $861 million U.S.) on Sept. 30. During the first half of fiscal 2007, the company recorded a 4 billion yen (around $36 million U.S.) loss on the sale of residential mortgage-backed securities, 17 billion yen (around $154 million U.S.) in RMBS write offs, and 11 billion (around $100 million U.S.) yen in loss provisions for warehousing loans.
On Nov. 8, Sumitomo said it took another 37 billion yen (around $335 million U.S.) in charges due to massive ratings agency downgrades of RMBS and collateralized debt obligations.
SunTrust Banks expects charge-offs through mid-2008 will be in the range of 0.35 percent to 0.45 percent, assuming no further material deterioration in the economy, according to a slide presentation prepared for the Merrill Lynch Banking and Financial Services Conference Thursday morning.
External managers for real estate investment trusts typically have a broad level of authority and are not required to balance their own interests with those of shareholders and bondholders, Moody’s Investors Service said in a report today. The conflict of interest can be mitigated, however, by using external managers with significant equity in the REIT.
While a new manager might require a new staff, a strong focus on specific performance requirements and external benchmarks will help independent directors decide on a manager, Moody’s said. The agency warned about having representatives of management on the board and giving up authority to determine executive pay and oversee accounting controls.
Massachusetts Secretary of State William Galvin is suing Bear Stearns Asset Management Inc., accusing the investment firm of improper trading with its two failed hedge funds. The funds invested in “special purpose vehicles” structured by managers of the funds themselves and bought and sold securities from those vehicles as well as from affiliated broker-dealer Bear, Stearns & Co. Bear Stearns Asset violated securities laws and its own rules by failing to notify the funds’ independent directors that it was trading securities from its own accounts with hedge funds it also advised, according to the complaint, and failed to provide notification about potential conflicts of interest.
“Investors who sought to take advantage of the inimitable risk management reputation of Bear Stearns found themselves in a highly complex hedge fund investment program that relied on overworked junior personnel to manage a conflict reporting process required by federal law,” the complaint read.
Downey Financial Corp. originated $178 million in loans during October, falling from about $231 million in September and $500 million a year earlier, according to its 13-month financial data release Thursday. The latest month’s activity included close to $104 million in loans originated and purchased for its portfolio, $73 million in loans originated for sale and $0.9 million in other loans. Mortgages services for others had a balance of $5.6 billion at October’s end.
Delta Financial Corp., the subprime lender that recently laid off almost half of its staff, signed a letter of intent to secure $100 million from an affiliate of Angelo, Gordon & Co., one of its principal stockholders, in December, Delta said in a filing Friday with the Securities and Exchange Commission. If the proposed transaction is completed, Angelo affiliate AG Special Situation Corp. will purchase $100 million of Senior Secured Notes that will mature three years after issuance. Delta will provide 40 million newly issued shares of common stock as additional consideration and reduce the exercise price of Angelo Gordon’s warrants to purchase 10.0 million shares of common stock to $1.00 per share. The notes will pay 10 percent and make Angelo Gordon the beneficial owner of approximately 61.4 percent of Delta’s outstanding common stock, and approximately 66.5 percent of the outstanding stock if all warrants are exercised.