Shellshock: Housing Woes Cause Lenders To Alter 'REIT' Status & Waive Juicy Dividend

Discussion in 'Stocks' started by ByLoSellHi, Feb 22, 2007.

  1. Subprime Lenders Hit Hard

    Published: February 22, 2007

    The toll is mounting for lenders that operate in the riskiest, and until recently, the fastest-growing, segment of the mortgage business.

    Shares of NovaStar Financial, which makes loans to people with weak credit, fell almost 43 percent yesterday after the company announced a surprise loss of $14.4 million for the fourth quarter and told investors that it might not make enough money to pay dividends for the next four years.

    The announcement, which highlighted the fact that more home loans made last year were delinquent than mortgages from 2005 and earlier, echoed reports issued earlier this month by New Century Financial and HSBC Finance, the American mortgage division of the global banking giant.

    Though each lender is suffering from a variety of individual ills, rising default rates among loans made to people with spotty, or subprime, credit appear to be the central problem for the industry.

    A major indicator of the trouble in the subprime market is the early-payment default rate, which measures the portion of borrowers who fall behind on their house payments within the first few months of taking a loan.

    Rising default rates and the related financial troubles of mortgage companies could hurt a broad segment of the American housing market. Among them will be the largely poor and minority home buyers who will see interest rates on adjustable mortgages rise, as well as investors in mortgage-backed securities who poured billions of dollars into these loans.

    The default rate jumped for loans made in 2006, as lenders allowed more borrowers to take out loans without documenting their incomes or making a down payment. Also, analysts note, homeowners who encountered financial problems had a tougher time refinancing or selling their properties because home prices were no longer rising in many parts of the country.

    “When there is good home price appreciation, you can get away with a lot of mistakes,” said Zach Gast, an analyst with the Center for Financial Research and Analysis, a forensics accounting firm in Washington that has been studying the subprime market. “But home price appreciation has stopped.”

    Subprime lenders were particularly susceptible to the change in the housing market, because they dealt with borrowers who often stretched financially to buy homes; more than half, for instance, took out adjustable mortgages. Many subprime lenders were not obligated to follow the tougher regulations that apply to commercial banks.

    In a conference call after the market close on Tuesday, executives at NovaStar attributed the company’s problems to a swiftly deteriorating housing market. The company, which is based in Kansas City, Mo., promised to tighten its guidelines and limit the number of exceptions to those rules.

    The company also said it would most likely not earn any taxable income for the next four years, though it did expect to have a positive net income. That is significant, because to maintain a favorable tax status as a real estate investment trust, NovaStar has to distribute at least 90 percent of its taxable income to shareholders in the form of dividends.

    Still, executives tried to focus on the positive and said NovaStar had enough cash on hand to weather its current problems. They also noted that as more mortgage companies encountered problems, NovaStar could face less competition.

    “The question that management is looking at right now is, is it in shareholders’ best interest to remain a REIT?” asked Scott Hartman, the company’s chief executive.

    Some of its investors were a bit less sanguine than that.

    The company’s biggest shareholder, Dreman Value Management of Jersey City, has been trying to liquidate its 5.8 percent stake in NovaStar, portfolio managers at the investment company said yesterday.

    Mark J. Roach, a portfolio manager at Dreman, said his fund made a good return on shares of NovaStar in 2005 but has been cutting back its exposure since. He said it now made up only 0.3 percent of the small-cap fund he manages, down from 2.5 percent in 2005.

    David N. Dreman, the chairman and chief investment officer of the fund company, said he has grown increasingly worried about subprime lenders, but was surprised by the extent of NovaStar’s problems. “There was no indication prior to this that they were going to have a problem,” he said.

    Some analysts and investors say the problems at NovaStar and other subprime lenders have been evident for some weeks and months.

    In late January, NovaStar posted the performance of the mortgages it securitized and sold to investors on its Web site. Investors who had been paying attention would have noted that the delinquency rate for loans made in 2006 had jumped to 7 percent from 2 percent in 2005, Mr. Gast of the Center for Financial Research and Analysis said.

    “They securitize nearly all their loans, so their performance shouldn’t have surprised anybody,” Mr. Gast said. He attributes the rise in delinquencies to the stall in home prices in 2006.

    NovaStar has also been a favorite among short sellers, investors who make money by betting that a price of a stock will fall. Short interest in the company’s shares made up about a third of its total shares outstanding last month.

    “When we initially shorted the stock, it was obvious that there was going to be some distress here,” said Whitney Tilson, who heads the hedge fund firm T2 Partners and who took a small short position in the stock in the last couple of weeks. “But when a company announces that they’re not going to have taxable income for four years, that’s amazing.”

    NovaStar Financial was founded in 1996 by Mr. Hartman, the chief executive, and Lance Anderson, the president, who had worked together at a mortgage banking REIT now known as Dynex Capital, in Richmond, Va.

    NovaStar’s obituary was nearly written in the late 1990s, when the ripple effect from the Russian debt crisis and the bailout of hedge fund Long-Term Capital Management crushed all assets that were viewed as risky from a credit standpoint. Facing margin calls from Wall Street broker-dealers as the value of its collateral fell, NovaStar stopped paying investors dividends in late 1998 and struggled with losses and liquidity for months afterward.

    Yet as the subprime market heated up during a long housing boom and the company resumed — and then increased — its dividend payouts, NovaStar found itself at the center of a battle between investors who owned its stock and loved its huge dividend payments and hedge funds who sold its stock short.

    Over the years, the funds challenged everything from NovaStar’s complicated accounting practices to its use of complex derivatives and whether it had the regulatory licenses to operate in various states.

    In a conference call in early 2005, NovaStar’s management, who thought the call was over and were unaware there were still listeners on the line, praised the head of investor relations for screening callers who might have asked unwelcome questions. One executive overheard on the phone used an obscenity to ridicule a questioner who asked whether the company’s dividend guidance was inflated.

    Still, the company had a strong following among investors who were drawn to its high dividend yield, which at $5.60 a share in 2006 was among the highest of real estate investment trusts. One passionate supporter of NovaStar who has acknowledged using a fake name, “Bob O’Brien,” went so far as to start a Web site,, to rebut negative reports on the company.

    Yesterday, in what he described as “probably my last writing here,” the investor had this to say on the site: “I am shell shocked after the conference that took place yesterday, and quite annoyed that I participated in the collective hallucination that led so many into such a disaster.”
  2. I might be adding FED to my short portfolio in the next few months if the data strengthens
  3. You're telling me..

    See, I'm an estate planner and I only sell ARMs. I hate the fact that articles like these give all ARMs a bad repuatation.

    I push COSI (World Saving's Cost of Savings Index) and the MTA (12 Month Treasury Average). Both indices are rather stable.

    This article is, of course, referring to all the damn LIBOR arms the frigging Countrywide sold with their massive middle America marketing strategy during the real estate boom.

    With Wachovia's acquiring of World SAvings, they will soon have their own index.. :) Wachovia has some STRONG programs by the way..

    haha, come to think of it, I did close some pretty shady deals with New Century last year......
  4. from FED...

    At September 30, 2006, 96.93% of our loan portfolio was invested in adjustable rate products.

    Negative amortization was 2.59% of all single family loans in the Bank's portfolio as of September 30, 2006. This compares to 0.86% at December 31, 2005 and 0.55% at September 30, 2005.
  5. But Rent-n-Roll and Circuit City reports record sales... Gotta have 28" spinners on the Toyota Corolla and a Plazma Screen TV to watch MTV.. 2.59% of trillions of dollars is a lot of friggin' money..

    If it's 2.59% in 06 and money grows exponentially does that mean its' going to be liek 6.95% in 07??
  6. never shorted fed as they are not available at my current broker but I will be posting a similar co that I will be shorting on a new thread
  7. Anyone have a source of high dividend REITS?