Interest Rate Roundup

Monday, September 17, 2007

E*trade exiting wholesale mortgage lending, taking losses; NovaStar cancels dividend; PHH goes ker-plunk

Some late-breaking news out of E*Trade Financial ...

* The company is boosting its loan loss allowance, blaming "the significant deterioration in the mortgage market in August and particularly the pace of change in the performance of home equity loans." It expects $95 million in charge-offs and a total provision expense of $245 million in the second half of the year.

* Asset-backed securities comprised of second lien loans, as well as CDOs, are losing value, so E*Trade is preparing to impair its holdings by up to $100 million.

* E*Trade is also jettisoning its wholesale mortgage operations.

There's also some news out of subprime lender Novastar Financial. In short, NovaStar is scrapping its plan to pay a dividend tied to its 2006 profit, and abandoning its Real Estate Investment Trust status. The company said it is continuing "to take steps to preserve liquidity, mitigate risks and manage our portfolio in the midst of a difficult environment for the mortgage industry and capital markets."

And I'd be remiss if I didn't mention the action in PHH Corp. The New Jersey mortgage lender's shares took a header today on news that a takeover deal may be in trouble. PHH was slated to be sold to General Electric, which was then planning to re-sell the mortgage business to the private equity firm Blackstone Group. But lenders are reportedly balking at funding the Blackstone part of the deal.

Is it just me, or are a lot of these mortgage sector deals -- signed by the "brain trusts" on Wall Street over the past several quarters -- proving to be nothing more than easy-money fueled foolishness? Blackstone for PHH. Cerberus Capital for Option One. Merrill Lynch for First Franklin (Merrill is now slashing jobs ... a mere nine months after buying the subprime lender for $1.3 billion ... and only a few months after hiring staff there, per Bloomberg). The list goes on and on.

It seems like many big name firms swooped into the mortgage sector in the past year to year-and-a-half on the assumption they were getting a bargain-basement entry into the business. The evidence now suggests they were both wrong and early. This has happened before, of course -- Anyone remember the not-exactly-well-timed purchase of The Money Store by First Union in the late 1990s? But it seems to be hapening a lot more these days.

One of the biggest flame-outs to date, though, has to be Greenlight Capital's move into New Century Financial. The hedge fund firm loaded up on New Century shares and tried to force management and strategic changes. You probably don't need me to tell you that move didn't exactly work out so well considering New Century went broke.


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