NovaStar Financial CFO Greg Metz said last week the "volatile mortgage environment" is expected to cause a portion of the subprime mortgage lender's subordinated securities to become permanently impaired. That scenario is more likely to be concentrated in the most recent vintages, he added, speaking during the company's third quarter earnings conference call.
Year-to-date, NovaStar has experienced $10 million worth of impairments. A majority of mortgage lenders that originate subprime loans, and particularly those that operate as REITs - a business model that requires a hefty portion of exposure to originated loans through the investment portfolio - have stated plans to sell loans in the whole market instead of directly securitizing and adding to the REIT during the quarter. Those lenders include New Century Financial Corp., Aames Investment Corp. (see ASR 11/07/05) and MortgageIT. And, at least in NovaStar's case, gain-on-sale margins are consistent whether the lender chooses to sell to its REIT portfolio for securitization or to whole-loan market investors.
"Coupons need to rise in order to return the industry to a respectable level of profitability," Metz said.
Even though average coupons for subprime loans are beginning to rise, issuers are saying the positive impact of those rate rises won't be realized until at least the first quarter of 2006. Issuers are anticipating lower gain-on-sale margins during this quarter compared to the third. NovaStar's margins have contracted 35 basis points during the third quarter alone and 150 basis points from a year ago, Metz added.
Nonetheless, NovaStar was still able to increase net income in the quarter by 52% from a year earlier, to $34.6 million from $22.7 million. The Kansas City, Missouri-based lender originated $2.8 billion of subprime loans during the quarter. Some $2 billion worth of loans were securitized, while $490 million were sold via whole-loan sales.
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