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Subprime Virus Infects Funds

Subprime Virus Infects Funds

Recent mergers, acquisitions & corporate activity

June 22, 2007


photo of Coco Salazar
The latest mortgage-related mergers, acquisitions and other corporate activity were overshadowed by the near collapse of two hedge funds invested heavily in subprime mortgage derivatives.

But first, NASDAQ has approved Accredited Home Lenders Holding Co.’s request for continued listing, Accredited announced. But the subprime lender is required to file its 2006 annual report with the Securities and Exchange Commission by Aug. 1, 2007 and its first quarter 2007 report by Aug. 19.

The House Financial Services Committee recently sent a letter to the Securities and Exchange Commission requesting clarification on accounting rule FAS 140 because some servicers may be withholding from modifying subprime loans to prevent foreclosure due to “fear” of violating the rule.

The letter asks: “Does FAS 140 clearly address whether a loan held in a trust can be modified when default is reasonably foreseeable or only once a delinquency or default has already occurred? If not, can it be clarified in a way that will benefit both borrowers and investors?”

The Office of the Comptroller awarded U.S. Bank N.A. a rating of “Outstanding,” the highest rating possible for commitment to Community Reinvestment Act, according to an announcement. Through the rating, the OCC acknowledged that the bank continues to meet the credit needs of all segments of the communities it serves. Among the factors supporting the rating are that U.S. Bank’s lending performance is excellent, as well as the distribution of home purchase loans to geographies of different income levels.

In the area of earnings, H&R Block Inc. reported a net loss for both the fiscal fourth quarter ended April 30, 2007 and fiscal 2007. It noted a net loss from discontinued operations was $808.0 million for the year and $676.8 for the quarter, “reflecting previously announced impairment charges and sales costs in connection with the pending sale of Option One [Mortgage Corp.], the write-down of residual interests, loss provisions on mortgage loans and the impact of mortgage pricing conditions in the secondary market.” Option One will be sold to an affiliate of hedge fund Cerberus Capital Management L.P. in a deal expected to close by Oct. 31.

Capital Bank announced it has limited exposure to a real estate development under investigation by the North Carolina attorney general. Of three loans, Capital believes only one, a consumer loan of $95,838 for the purchase of a residential lot in the development, is involved in an alleged investment scheme created by out-of-state developers who promised consumers a profit would be made on the property by taking out loans and without having to invest any of their own money.

United Community Banks Inc. recently said it is one of several lenders that financed loans for related lots, and that although it was unable to quantify the extent of losses the loans would create it believed it had adequate loan loss reserves.

Multiple community, regional and super-regional banks, in and out of North Carolina, are connected to the project in a wide range of investments. Capital Bank’s limited exposure consists of three loans: One loan, in the amount of $1.2 million, is to the named developer and is collateralized by 60 lots in the project. Capital Bank’s collateral is the wholesale value of the lots, which is $20,563 per lot.

At month’s end, Wells Fargo & Co. expects to close on the deal to acquire the U.S. construction lending business unit of CIT Group Inc, according to a news release. CIT Construction originates and services senior secured loans collateralized by a wide range of high-quality construction equipment.

Amergy Bank of Texas will purchase Intercontinental National Bank in a transaction expected to close in the third quarter, Amergy Bank N.A. announced. The merger will allow Amergy to expand on its Central Texas foundation.

Oxford Funding Corp., which acquires and rehabilitates subprime mortgage portfolios from the secondary mortgage market, announced that it intends to buy San Felipe Commercial Mortgage, which facilitates hard-money and traditional financing for commercial real estate development, construction and permanent financing.

“This acquisition will provide a platform from which Oxford can grow its portfolio of subprime mortgage assets,” Oxford said in the announcement. “The rising volume of under-performing and non-performing subprime notes provides an excellent opportunity for Oxford to grow through the active acquisition of discounted sub-prime assets.”

The acquisition announcement comes after Oxford’s recent move to a larger headquarters in Houston to handle expected business growth and its appointment of Ron Redd as its new chief executive officer. Redd, who will lead the company in seizing opportunities created by the recent downturn in the subprime mortgage industry, managed the acquisition, restructuring and resale of over $750 million in secondary mortgage assets during the mortgage crisis of the early 90s, Oxford noted.

Hedge fund Pennant Capital Management LLC announced that it issued a letter to the board of PHH Corp. in which it opposed PHH’s decision to split up and sell itself. PHH agreed to be acquired by GE Capital Solutions, a unit of General Electric Co. and buyout firm of Blackstone Group. Pennant said that stockholders would gain more through continued public ownership and a business separation through a spin-off, noting there had been “accelerated profit growth” in the fleet business and improvements in the mortgage business. Pennant said it was “disturbed” by PHH’s omission, in a recent preliminary proxy filing, of information required to understand alternatives besides the proposed sale and demanded that PHH provide such.

“Shareholders will not be able to make an informed decision about the pending sale unless” the fairness opinions evaluate the option to remain public and pursue a spin-off, the tax leakage associated with the proposed sale and break-up is quantified, there is a breakdown of the after-tax proceeds from the sale of the mortgage business, longer-term internal projections are disclosed as well as whether PHH’s CEO and other management have any agreements or are in negotiations with Blackstone regarding future employment and equity participation, Pennant’s announcement said.

ResMAE Mortgage Corp. announced it recently emerged from Chapter 11 as an entity of RMC Mortgage Holdings, an affiliate of Citadel Investment Group LLC. ResMAE, which recently appointed Rick Skogg as its president, said it “refocused its sales efforts” for stronger broker relationships and to improve production, and that it enhanced origination process and strengthened the credit review process to increase overall loan quality.

The Bear Stearns Companies Inc. will bail out an internal hedge fund.

The New York-based investment banker will provide $3.2 billion in financing to The Bear Stearns High-Grade Structured Credit Fund, according to an announcement today. The collateralized repurchase agreement will replace current financing from lenders including Merrill Lynch — which had reportedly begun liquidating assets.

“Over the past few weeks, the High-Grade Fund and The Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund have experienced high levels of margin calls and have had difficulty in creating necessary liquidity and working capital to continue to operate the Funds,” Bear said in the statement. The deal will “improve the fund’s liquidity and facilitate an orderly de-leveraging of the fund in the marketplace.”

Bear is the parent of EMC Mortgage Corp. and Encore Credit Corp.


Coco Salazar is an associate editor and staff writer for

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