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Execs Shuffled as Losses Mount

Execs Shuffled as Losses Mount

Recent mortgage related corporate activity

January 7, 2008


photo of Coco Salazar
Earnings continue to dominate the board rooms of U.S. mortgage related companies, though some executive shuffling occurred during the most recent week.

As part of its planned restructuring into five different entities, IAC named President and Chief Operating Officer Doug Lebda as chairman and chief executive of its financial services and real estate businesses, which include LendingTree and HomeLoanCenter. LendingTree CEO C.D. Davies will retain his role and report to Lebda.

The top executives of bankrupt HomeBanc Corp., Patrick S. Flood and Kevin D. Race, are being sued by investors who purchased the company’s common stock during Sept. 26, 2005, through Aug. 3, 2007. Chitwood Harley Harnes LLP, the law firm representing the investors, said a filed complaint accuses the executives of securities law violations, including misrepresenting its liquidity position and the risk of loss to investors.

Huntington Bancshares Inc. announced its restructured relationship with Franklin Credit Management Corp. will reduce its fourth quarter loan and lease loss provision related to Franklin to $276 million from the previously disclosed $300 million. The new agreement comes after Huntington, Franklin’s biggest lender, halted funding for the company after Franklin disclosed a deteriorating mortgage portfolio. New lending agreements put Franklin’s debt at $1.63 billion, a debt reduction of about $300 million, and no longer require Huntington to front advances for portfolio acquisitions and loan originations. Franklin must first have approval from Huntington for future moves and has paid Huntington $12 million in restructuring fees.

On the other side of the spectrum is Regions Financial Corp., which said it is planning on increasing its loan loss provision to $360 million for the fourth quarter — about $270 million higher than in the third quarter of 2007. The Alabama-based lender cited “weakening credit quality, primarily in its residential builder loan portfolio,” as the reason, and noted there has been a sharp slowdown in real estate demand in Florida and Georgia. While Regions expects weakness to continue this year within residential builder loans, which represent about 8 percent of its $95 billion portfolio, it noted its first mortgage and home equity portfolios generally continue to perform well.

Irwin Financial Corp. said it expects mortgage- and housing-related credit costs to cause fourth quarter losses of $15 million to $20 million. The bulk of weakness was in its home equity mortgage portfolio, though there was also “some softening” in certain portions of its commercial real estate portfolio. The results will include a $5 million charge for operational and staff restructuring.

While Irwin also expects a restructuring charge of less than $2 million for the first quarter, it noted it has seen of a leveling-off of repurchase requests in discontinued operations and is starting to see opportunities for material recoveries from losses stemming from representation and warranty claims.

State Street Corp. said it will set aside a pretax $681 million to address legal exposure and other costs associated with active fixed-income investments with exposure to subprime mortgages. As a result, the investment firm will record an after-tax net charge of $279 million for the fourth quarter.

Banks need to increase capital reserves to offset risks in financial vehicles and strategies, especially when considering the lack of full information when risk is transferred, Moody’s Investors Service suggested in a report today.

“The ‘originate-and-redistribute’ model for banks has entailed some degree of system-wide information loss once banks have started transferring risk that they would have preferred not to keep on their balance sheets,” Moody’s reported. “The final holder of a financial claim has probably less information than the originator of the claim.”

Rating agencies have been unable to provide help here because the market has less incentives to provide more information. Capital buffers and better information will be needed.

Credit market worries are expected to contribute to slower U.S. merger and acquisition activity in the first half of the year from the previous year, Piper Jaffray announced. Such activity was off 4 percent in the first nine months of 2007, compared to the same period in 2006. Large deal activity is likely to be the hardest hit, as the “mega-buyouts” will have difficulty securing financing in this year’s first six months. While middle market merger and acquisition levels will largely depend on the health of the economy, economic strength at the global levels is anticipated to keep first half activity well above the recessionary levels seen in 2002.

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