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Losses Lead to Lawsuit, Exec Changes

Losses Lead to Lawsuit, Exec ChangesRecent mergers, losses and corporate activity

May 20, 2008

By SAM GARCIA

Reports of mortgage-related losses continued, as did legal actions against banks and mortgage companies. Two financial services companies announced changes at the top.

Beleaguered NovaStar Financial Inc. reported a $283 million first-quarter loss, compared to a $46 million profit a year earlier, a Securities and Exchange Commission filing said. The Kansas City, Mo.-based company had a $724 million loss for all of 2007. NovaStar said it now operates as just a nonconforming residential mortgage portfolio manager that could still be forced into bankruptcy.

Thornburg Mortgage Inc. said it expects to have its delayed first-quarter results, which will reflect a “substantial net loss,” filed with the SEC by June 2. More time was needed to report earnings because of the need to determine valuation and accounting for newly issued senior subordinated notes and an override agreement on a reverse repurchase agreement.

Tokyo-based Mizuho Financial Group Inc. reported a JPY 311 billion loss (U.S. $3.0 billion) for 2007, about JPY 310 billion (U.S. $3.0 billion) worse than the prior year. The decline in earnings stemmed from U.S. subprime loan issues.

Downey Financial Corp. shareholders are suing the Newport Beach, Calif.-based company for “issuing materially false statements regarding the company’s financial results,” according to an announcement from the law firm of Schatz Nobel Izard P.C. Class-action status is sought in the case, which was filed in U.S. District Court for the Central District of California on behalf of investors who purchased shares of the company between Oct. 16, 2006, and March 14, 2008.

Luminent Mortgage Capital Inc. Director Zachary H. Pashel has been appointed president and chief executive officer, a statement Thursday said. Pashel previously headed structured finance at The Chotin Group Corp.

A 10-week audit committee investigation found that Franklin Bank Corp. improperly accounted for loan modifications on single-family loans, did not charge off its un-collectable second liens and failed to record or write-down real estate owned. In addition, loans transferred from held-for-sale to held-for-investment were not marked-to-market.

Franklin said it reported its investigation to the SEC, which has commenced its own formal inquiry.

As recommended by the Houston-based bank’s audit committee, Franklin founder and Chief Executive Officer Anthony J. Nocella will accelerate his retirement, though he will continue as chairman of subsidiary Franklin Bank S.S.B. Lewis S. Ranieri, who is chairman of the parent company and credited with creating mortgage-backed securities, will step in as interim CEO until a new chief is found. Director Alan E. Master will temporarily resign from the board as he assumes the role of president until a replacement is found.

The Office of the Comptroller of the Currency announced civil money penalty orders were issued against Myriam Zaldivar, Terrabank N.A., Miami; Earl Ford McNaughton, The First National Bank of Fremont, Fremont, Ind.; United Bank For Africa PLC, New York; Wachovia Bank, N.A., Charlotte, N.C.; and Liberty National Bank, Lawton, Okla.

In addition, the regulator said it entered formal agreements with First National Bank & Trust Co. in Larned, Kan.’ Wachoiva Bank, N.A.; and The First National Bank of Berlin, Wis.

OCC also said it issued Removal-Prohibition Orders against Myriam Zaldivar, Terrabank N.A.; Earl Ford McNaughton, The First National Bank of Fremont; Brian McCabe, Wachovia Bank, N.A.; and Zoran Levajac and Kathleen Lovelace, Commerce Bank, N.A., Philadelphia.

Flagstar Bancorp Inc. has agreed to raise $100 million through the sale of equity securities to seven institutional investors, Chairman Thomas J. Hammond and President and CEO Mark T. Hammond.

“Until such time as the capital markets normalize and the residential real estate market shows signs of improvement, we plan to operate at capital levels that are higher than our historic norms,” Troy, Mich.-based Flagstar said.


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