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Profit at REIT Contrast Mortgage Sector Losses

Profit at REIT Contrast Mortgage Sector LossesRecent mergers, earnings and corporate activity

February 12, 2008


As earnings at companies including IndyMac Bancorp Inc. continued to be pounded by mortgage-related charges, one mortgage company reported an increase in net income.

Fitch Ratings placed the issuer default rating of American International Group Inc. and some of its subsidiaries on Rating Watch Negative because of AIG’s disclosure yesterday that its independent auditor believed there was a material weakness in internal controls related to the valuation of AIG’s super-senior credit derivative portfolio.

Fitch said AIG has relatively large exposure to the mortgage crisis, with a $505 billion credit derivative portfolio at AIG Financial Products Corp., including $62.4 billion of collateralized debt obligations backed by mainly U.S. subprime residential mortgage-backed securities.

IndyMac reported a fourth quarter loss of $509 million, more than double the third quarter loss of $203 million, according to its earnings release today. A year earlier, the firm reported net income of $72 million.

The latest period reflected $863 million in total pre-tax credit provisions/costs, reflecting $179 million in actual chargeoffs, IndyMac said. Chargeoffs are expected to increase substantially this year.

Full-year earnings were a $615 million loss at the Pasadena, Calif.-based company, far worse than the $343 million profit during 2006 and its “first annual loss in its 23-year history.” IndyMac does expect to squeeze out a $13 million profit this year.

National City Corp. deceived shareholders about its business and financial results, according to Holzer Holzer & Fistel, LLC. The Atlanta-based law firm announced it filed an investor class action on behalf of shareholders that purchased stock from April 30, 2007, to Jan. 2, 2008.

Holzer alleges the Cleveland-based company hid the risk of its subprime holdings, held inadequate reserves and had no reasonable basis for favorably projecting dividend payments.

The National Association of Real Estate Investment Trusts Monday said its data indicate “REITs may be approaching their bottom and that REIT stocks offer superior value for investors.” The group explained REIT shares saw a strong rebound in January — with an acceleration in the second half of the month.

Capstead Mortgage Corp., a Dallas-based REIT, reported last week its fourth quarter net income climbed to $15.9 million from $2.4 million a year earlier. The earnings reflected significant increases in financing spreads, driven by recent Federal Reserve actions, and net interest margins on the its core investment portfolio of agency-guaranteed residential adjustable-rate mortgage securities.

“We are cautiously optimistic that the turbulent credit markets experienced the last two quarters are largely behind us,” Capstead President and Chief Executive Officer Andrew F. Jacobs said in the statement. “At Capstead, we believe we have improved our ability to withstand periods of contracting market liquidity by lowering our leverage to approximately 10 to 1, expanding the number of lending counterparties with which we routinely do business, and bolstering our long-term investment capital by raising approximately $324 million in common equity capital over the last four months.”

First Tennessee Bank National Association has completed the sale of 25 First Horizon Bank branches — though each will continue to refer loans to the company’s mortgage unit, an announcement from its parent company said Monday. Sterling Bank acquired 10 Dallas-area branches Friday, M&T bought 13 East Coast branches in December and an FMCB Holdings Inc. unit acquired two Georgia branches, also in December.

Global Links Corp. announced today the acquisition of an 80 percent controlling interest in Nevada Home Funding Corp., formerly known as Nevada Home Funding Group LLC. Global, which operates a title company and a real estate brokerage, plans to move the mortgage operations to its Las Vegas headquarters.

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