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Mortgage Trauma Worsens

Mortgage Trauma Worsens

Recent mergers, acquisitions & corporate activity

June 29, 2007


photo of Coco Salazar
A host of companies warned investors about earnings this week as mortgage-related charges continue to spread outside the industry. The volatile environment has rocked investment banking houses and led the ouster of a number of senior executives. Meanwhile, merger activity is strong and expected to expand, according to a recent report.

But first, Allied Home Mortgage Capital Corp. announced it opened a new branch in Southaven, Miss., which represents its second in the city and third in the state

In Woodbury, N.Y., Delta Financial Corp. announced it was added to the Russell 3000 Index on June 22. Russell determines annual membership for its equity indexes primarily by objective, market-capitalization rankings and style attributes.

Moody’s Investors Service said it affirmed Accredited Home Lenders Inc’s SQ#+ rating as a subprime residential servicer following word of the San Diego-based company’s acquisition by Lone Star Funds.

Commerce Bank N.A. consented to a cease and desist order issued by the Office of the Comptroller of the Currency. The office said an investigation revealed information making it necessary to issue the order to “ensure that actual or apparent conflicts of interest or unsafe or unsound practices involving the construction or acquisition of branch offices do not occur in the future.”

Mellon Bank N.A. has agreed to pay an additional $16.5 million to settle claims related to the destruction of about 77,000 individual tax returns and checks in 2001 that it was supposed to process as an agent for the Treasury Department, the Justice Department announced today. Seven former Mellon employees had previously been charged in connection with the destruction of the forms and have entered guilty pleas.

Mellon allegedly lied when it notified the IRS that it had met a deadline to process individual tax returns and checks but employees had destroyed the forms it had received from taxpayers, “all in an effort to deceive the government about Mellon’s timely completion of the 2001 tax program.” Today’s agreement brings Mellon’s payments to the government on this matter to $34 million, as it is the third it has made to address the problems arising from the destruction of the tax returns.

On Tuesday, Bear Stearns Companies Inc. said the $3.2 billion secured financing facility it had offered last Friday to the High-Grade Structured Credit Fund, or the hedge fund managed by Bear Stearns Asset Management, actually turned out to be about $1.6 billion due to additional asset sales.

Everquest Financial Ltd., which last month filed plans for an initial public offering, disclosed that it has ties with Bear’s troubled hedge fund and that Bear transferred riskier parts of collateralized debt obligations that they owned to Everquest when the company was being set up last year, MarketWatch reported. It is believed Bear was “selling its highest-rated and most heavily traded securities first to raise cash to meet redemption requests and possible margin calls.”

Bear said it continues to work with the creditors and counterparties to facilitate an orderly de-leveraging of the fund in the marketplace. Remaining outstanding repo balances are approximately $1.2 billion. Bear is not providing any financing to this fund.

“By providing this secured financing facility we believe we have helped stabilize and reduce uncertainty in the marketplace,” said James E. Cayne, Bear chairman and chief executive officer, in the announcement. “We believe the repurchase agreements are adequately collateralized and we do not expect any material adverse effect on our business as a result of providing this secured financing.”

“The subprime mortgage market has been challenging for a number of months. Over this time period Bear Stearns’ core trading and capital markets businesses have managed this risk well. We see no material change in our risk profile or counterparty exposure as a result of the reaction in the marketplace regarding the situation surrounding these hedge funds.”

Bear today announced the immediately effective appointment of Jeffrey B. Lane as chairman and CEO of Bear Stearns Asset Management. He replaces ousted Richard Marin, who will remain as a senior advisor to Lane.

“Our focus is on restoring investor confidence in [Bear Stearns Asset Management], serving our clients with excellence and assuring them of our commitment to provide them with the highest quality asset management products and services,” Bear said in today’s announcement.

George Hanzimanolis is the new president of the National Association of Mortgage Brokers. The president of Bankers First Mortgage, who has been in the mortgage broker industry for nearly 20 years, became NAMB president at the trade group’s annual convention and exposition recently held in Seattle, Wash.

Meanwhile, Beazer Homes USA Inc. fired its chief accounting officer, Michael T. Rand, due to violations of the company’s ethics policy stemming from attempts to destroy documents, the homebuilder said in a Securities and Exchange Commission filing. The company became aware of Rand’s actions during an investigation its audit committee is conducting on its mortgage origination business.

Wells Fargo & Co. appointed John G. Stump to be its chief executive officer and kept him in the role of president as well. He succeeds Dick Kovacevich, who continues as chairman and will remain with the company no later than the end of next year when he turns 65, to be consistent with Wells’ policy for senior executives.

Citizens Republic Bancorp announced that it will record a second quarter provision for loan losses in the range of $30 million to $35 million as a result of anticipated net charge-offs of between $20 million to $25 million and an increase in nonperforming loans of $20 million to $25 million. The charge is expected to have a $0.26 to $0.30 impact on diluted net income per share this quarter.

Citizens “detected deterioration in the commercial real estate portfolio and downgraded the risk rating of 180 commercial real estate loans with outstanding balances of approximately $145 million,” the lender explained in the announcement. “The charge-offs and the risk rating downgrades affect Citizens’ calculations for future estimated losses in the allowance for loan losses and drive the additional anticipated provision in excess of the net charge-offs.”

In an update filing with the SEC, NetBank Inc. said it expects $5.8 million to $6.2 million in charges related to its previously-disclosed plan to shut down its mortgage servicing platform and terminate its sub-servicing relationship with IXIS Real Estate Mortgage Capital Corp.

Impac Mortgage Holdings Inc. said it will not be declaring a second quarter 2007 dividend on its common shares. The company explained that it has experienced higher-than-expected losses through the accelerated liquidation of its real estate owned portfolio in an auction process implemented this quarter. The reason cited for not declaring a dividend is because it believes accelerating the disposition of REO’s through the auction process will ultimately reduce losses and preserve capital over the long run.

“Although we are seeing charge offs at levels higher than we anticipated, we are pleased to have reduced our exposure to future losses by auctioning REO’s, especially as real estate values may deteriorate in the near future, said Joseph R. Tomkinson, Impac chairman and chief executive officer, in an announcement. “In light of increased delinquencies, REO and loan losses, we believe it is prudent to aggressively liquidate REOs in this market.”

Grove Nichols, IndyMac Bank communications director, reportedly said that the credit quality and performance of its Alt-A loans originations and sales as securities in the secondary market as of March 31 is “far superior” to those of Impac, according to Nichols’ comments were in response to an article by the investment publication that stated Impac’s “worst of times are behind it because the company has adequately set up loss reserves to handle loan defaults,” while “IndyMac’s credit risk and anticipated increase in future credit losses are not yet reflected in their current stock prices and that their risk/reward profile support our sell rating.”

American Home Mortgage Investment Corp. announced it will take substantial charges for credit-related expenses in the second quarter, making its financial results for the quarter uncertain and likely to head for a loss. The expenses have been primarily caused by the three month “timely payment” warranty the company granted to purchasers of its stated income loans with high loan-to-value ratios, which have been discontinued. The Melville, N.Y.-based lender additionally said the current mortgage market conditions will lead it to withdraw its previous earnings guidance for 2007 and reestablish it toward year-end.

“A benefit of the substantial reserves we are establishing in the second quarter is that the discontinued product’s impact on our future financial results is likely to diminish,” said American Home CEO Michael Strauss in the written statement. “Altogether, the second quarter will be a period of “clean-up” as the impact from the discontinued products continues to wind down.

American Home also said it issued in a private placement $125 million of convertible trust preferred securities to funds managed by Marathon Asset Management LLC.

PricewaterhouseCoopers announced that it expects accelerated merger and acquisition activity this year as deal values soar. In the five months through May, deals involving U.S. targets totaled $845 billion, which is 53 percent of the total for all of last year and 10 percent more than deal value in the entire first half of 2006. Private equity firms, which in the first five months accounted for 48 percent of M&A value and one-fifth of the volume, will continue to be a large and permanent fixture in the M&A landscape on the buy and sell sides.

While the default rate on U.S. speculative-grade loans remains at its lowest level since the early ’80s, half of all new high yield debt issued in the first two months of the year was rated B- or lower, compared with 32 percent in 2006.

“History shows that default rates trend up as the peak of M&A activity approaches, but default rates are still holding at moderate levels,” PricewaterhouseCoopers’ announcement read. “While a liquidity crisis or rapidly rising interest rates could change that in a hurry, things look strong into ’08.”

On Monday, Fidelity National Information Services Inc. said it acquired Applied Financial Technology, a provider of quantitative analytics used by brokers, banks and investors to price, fund, trade and hedge mortgages and mortgage-backed securities. With the acquisition, Fidelity’s expanded product suite will empower these entities to leverage its data and valuation services with Applied’s analytics to proactively manage prepayment and default risk for a variety of loan portfolio scenarios.

Capital Bancorp Inc. said its shareholders recently approved for the company to be acquired by Renasant Corp., a transaction scheduled to be consummated on July 1.

Northrim BanCorp Inc. announced it expects to purchase Alaska First Bank & Trust N.A. for $6.25 million in cash in the fourth quarter. The deal does not include Alaska First’s subsidiary Hagen Insurance and calls for Alaska First to merge into Northrim Bank.

National Penn Bancshares Inc. has signed to acquire Christiana Bank & Trust Co. in a $56.5 million stock-and-cash deal expected to close in the first quarter 2008, a news release stated. The parent of National Penn Mortgage Co. said the acquisition will accomplish three important goals in its growth strategy: adding another strong-growth business to its franchise; helping to diversify its revenue base; and gaining geographic presence in Delaware, “a demographically attractive region immediately adjacent to National Penn’s existing coverage areas.”

CVB Financial Corp. reported it completed the $35 million acquisition of First Coastal Bank N.A. CVB, which is parent to Citizens Business Bank and specialty finance company and mortgage brokerage Golden West Financial Services, added that the merger expands its geographic presence into the South Bay and West Los Angeles areas of California.

The former chairman of the Mortgage Bankers Association, Regina M. Lowrie, is launching a new mortgage lender, an announcement stated. Operating as a subsidiary of American Home Bank, Vision Mortgage Capital will focus on emerging markets. Lowrie is also the founder of Gateway Funding. Capital Bancorp Inc. said its shareholders recently approved for the company to be acquired by Renasant Corp., a transaction scheduled to be consummated on July 1.

Citing a desire to grow in the subprime residential mortgage business, Oxford Funding, which acquires and rehabilitates subprime mortgage portfolios from the secondary mortgage market, will acquire commercial and residential mortgage broker Huntington Financial, according to an announcement.

Jumbo loan lender Power Express Mortgage Bankers announced its acquisition of Pasadena, Calif.-based Valley Mortgage Bankers, which has been originating and closing residential, commercial and construction loans for more than five years. The acquisition supports New York-based Power’s goal of increased volume through the expansion of retail branches.

Specialty consumer finance company Green Tree Servicing said it will be acquired by an investor group led by Centerbridge Partners L.P. and its affiliates in a deal expected to close in the third quarter. The investor group is buying all of the company’s equity from funds managed by affiliates of Fortress Investment Group and from affiliates of Cerberus Capital Management. Through this investment, Green Tree, which focuses on servicing the mortgage and manufactured housing markets, expects to grow its loan servicing volume and invest in new loan portfolios.

Bank of America is tapping into the senior citizen demographic with its announcement today that it has completed acquiring Reverse Mortgage of America from Seattle Mortgage Co. BoA’s reverse mortgage origination operations will be headed by John Nixon, formerly executive vice president and COO of Reverse Mortgage.


Coco Salazar is an associate editor and staff writer for

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