The mortgage market was beginning to look like ducks in a shooting gallery last week after a devastating amount of bad news. The injured participants, C-BASS, NovaStar Financial, American Home Mortgage Investment Co., HomeBanc, Impac Mortgage Holdings, National City Corp., Luminent Mortgage Capital and Aegis Mortgage Corp., among others, took a beating. Some were more crippled than others.
The most severe news came from American Home Mortgage. The company announced not only that it was closing all but its thrift and servicing businesses and laying off 6,250 of its 7,000 employees, but also that it was filing for Chapter 11. AHM said it is highly unlikely that its values will be sufficient to pay its creditors in full - its listed debts are more than $100 million - and no shareholder equity value will likely be remaining. The firm also said it wants to auction its loan-servicing business and loan portfolio. Bids are due Aug. 29.
As a result, Fitch Ratings downgraded the company's residential primary servicer rating for prime product to RPS4' from RPS3-', its residential primary servicer rating for Alt-A product to RPS4' from RPS3-', and its residential primary servicer rating for home equity and home equity lines of credit to RPS4' from RPS3-'.
In conjunction with the filing, WL Ross & Co., through its WLR Recovery Fund III, has agreed to provide the company with up to $50 million in debtor-in- possession (DIP) financing.
Layoffs also came from Impac Mortgage Holdings, which suspended originations of Alt-A loans. While the company said it has met all its margin calls to date, volatility in the secondary and securitization markets has put a hold on the business.
"Clearly right now, they are in loss mitigation mode. The first thing is to preserve liquidity at the company," said Matt Howlett, vice president and mortgage and REIT analyst at Fox, Pitt and Kelton. "They have met their margin calls, but they really need to sell the held-for-sale assets, which are declining in value." Impac had negotiated the sale of approximately $1 billion of its loans held on financial facilities, which are scheduled to close over the next 30 days. But the firm still has $600 million left to sell, which, in total, should permanently finance its assets so there are no longer any margin-callable repo financings, Howlett said.
However, without the Alt-A program, which had been their main business focus, the firm will have to live off its existing portfolio. Impac still has a fairly large portfolio with cash flowing in and positive interest margins generating enough cash for the company to continue operations, but Impac will need to absorb some losses. "It is about preserving shareholder equity right now, and they are just going to rely on their existing portfolio and focus on liquidity," Howlett said.
Impac has announced that it has secured definitive agreements to begin originating and selling reverse mortgage loans through its wholesale and retail platforms. The firm will also continue funding conforming loans through its acquired entity, the retail and wholesale platform of Pinnacle Financial Corp., and maintain its auction company and an REO company.
Still, a prolonged liquidity crisis would not bode well for Impac's ability to sustain its operations, just like any firm that relies on nonprime securitization for funding, market participants agreed. However, the company's business model as a conduit correspondent-type originator will make it very easy for Impac to re-enter the market if it does rebound, Howlett said.
Cease and Desist
Other suspensions took place at HomeBanc Corp., which announced it would stop funding at its mortgage loan origination business and that it is no longer accepting loan applications.
The company, which is presently unable to borrow on its credit facilities, also said that it will sell certain assets related to its retail loan origination operations, including selling to Countrywide Financial Corp. up to five branches located in Georgia, Florida and North Carolina. Aside from assuming the leases related to those branches, Countrywide expects to make offers of employment to most of HomeBanc's retail loan originators.
The list of casualties continues with National City Corp., which said that its wholesale home equity unit has stopped taking applications for new home equity loans and lines of credit, though it will continue to offer home equity products through its retail bank.
Meanwhile, C-BASS announced that it has tapped The Blackstone Group as financial adviser to assist the company in finding additional ways to secure capital in order to keep the fast-sinking company afloat.
However, market analysts were not as optimistic. "There is a real possibility that the company goes away just because of liquidity calls that came in so quickly," said Rob Haines, an analyst at independent credit research firm CreditSights. "It is another example of how cognizant the companies and rating agencies have to be in stress testing for fat-tail events." Haines added that C-BASS claimed to have prepared for stress events, but apparently it did not. "When you get a fat-tail event like this, where there are a lot of intercorrelations in the whole market with deteriorating asset classes, liquidity just completely dries up and unfortunately folds."
While C-BASS could get someone like a hedge fund to come in, at a fire-sale price, and purchase it to pump in some liquidity to keep the company functioning, the odds are unlikely, Haines said. He noted that if C-BASS and its loan servicing entity Litton Loan Servicing were to go away, Litton could operate as a run-off company if there were sufficient cash, or the loans would go into a receivership to be eventually purchased
C-BASS's parent companies also shook up the market when MGIC announced that, based on the potential write-down of C-BASS, it is no longer obligated to complete its merger with Radian Group, C-BASS's other owner. While MGIC maintained that C-BASS was the motivation behind its attempt to pull out of the deal, the increased concern regarding Radian's book of business, which contains riskier assets like second-lien mortgages, may be the real culprit, according to a recent report by CreditSights' Haines and analyst Joe Di Carlo. The pair suspected that Radian's books might in fact be deteriorating more than previously expected, noting that on news of the possible merger termination, Radian's five-year CDS widened by more than 100 basis points, to approximately 520 basis points. Calls to Radian were not returned by press time, while MGIC declined to comment.
Real estate investment trust Luminent Mortgage Capital added to the bad news by canceling a dividend payment and announcing it has experienced a significant increase in margin calls on its highest quality assets. A spokesman for Luminent declined to elaborate on what those assets were. Luminent also received notices of default from two repo lenders. At the same time, subprime lender Aegis Mortgage Corp. shut down its mortgage business and laid off an undisclosed but "substantial" number of employees. Meanwhile, Morgan Stanley closed the correspondent division of subprime lender Saxon Mortgage in order to
focus more on its larger wholesale and servicing business, Morgan Stanley Home Loans.
NovaStar Financial also took an interesting turn last week when it suspended funding or approving loans in its wholesale-lending unit - only to restart operations four days later. The firm said that based on a re-evaluation of current conditions in the secondary market, it has adjusted its pricing and guidelines.
During the pause in its operations, the firm's servicing business did not appear to be affected. "Typically, when a company stops originating, its servicing ability isn't impacted. [The companies] still typically have their lines of credit and servicing revenues, and they can continue to do business as usual, more or less," said Mary Kelsch, senior director at Fitch Ratings. However, the company's servicer rating was downgraded in May to an RPS3+' from an RPS2-,' reflecting the challenging subprime environment and uncertainties about the parent company's profitability, which could eventually hit the servicing platform causing it to suffer from a lack of funds for infrastructure and new technology initiatives. Calls to Chris Miller, who is senior vice president of servicing at NovaStar, as well as calls to a company spokesman, were not returned by press time.
WestLB Mellon Asset Management rounded out the bad investment news, halting redemptions in its Compass Fund. About 80% of the fund was invested in mortgage-backed securities at the end of March, according to a UBS report.
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