Monday, May 09, 2005

Novastar In Yield Curve Vise

Novastar Financial reports that the rising short term rates and flat long term rates have put the firm in a squeeze. "Another trend is that profit margins in the mortgage banking industry continue to tighten. Competitive pressures are holding mortgage loan coupons generally flat while short-term interest rates continue to increase."

"One-month LIBOR and the two-year swap rate increased from 1.09% and 1.88%, respectively, at March 31, 2004 to 2.87% and 4.19%, respectively, at March 31, 2005 while the weighted average coupon on our nonconforming originations and purchases for the three months ended March 31, 2005 was 7.6% as compared to 7.4% for the same period in 2004. These factors contributed to the whole loan price used in valuing our mortgage securities..to significantly decrease throughout 2004 and into the first quarter of 2005."

Over the last ten years, the nonconforming lending market has grown from less than $50 billion to approximately $530 billion in 2004. One of the main drivers of growth in this market has been the rise in housing prices which gives borrowers the opportunity to use the equity in their home to consolidate their debt."

11 Comments:

At 11:25 AM, Anonymous Anonymous said...

Makes me wonder who will eat the losses when a lot of people walk away from the mortgages in which they find themselves upside-down. I believe the new bankruptcy rules are scheduled to take effect in October. Marginal borrowers have relatively little time to decide whether to bail out and take their licks under the current law or to hold on and hope for the best.

 
At 11:33 AM, Anonymous Don said...

Lawyers here in CA are running dedicated bankruptcy advertising pumping the benefits of declaring bankruptcy now because of the upcoming changes.

 
At 12:03 PM, Anonymous Anonymous said...

Actually, long term rates went up on Friday and seem to be going up today.

If Wall Street starts to feel a bit less concerned about the future, they may go up a bit more and you will have a reasonably "healthy" curve again.

Of course, this is not going to save the house market, especially with so many people with ARM tied to long term rates...

 
At 12:04 PM, Anonymous nostradamus said...

I saw my first foreclosure ad on late-nite TV last week. The basic gist was that they would buy your home so you didn't have to default on your loan. I think we will be seeing a lot of these ads over the next few years.

Also seeing a lot of bankruptcy ads. My guess is that they are building mind-share before the bankruptcy bill takes effect.

My advice to any homeowner (or "homeower") poorly positioned for a RE downturn: sell now, avoid the rush.

 
At 12:19 PM, Anonymous Anonymous said...

this is the perfect storm, folks... if you have cash, just wait it out... greenspan is going to continue to raise rates until he retires... this will shake out the people who used "creative" mortgages... thus, bringing an over-supply to the market... just be patient... long term rates will stay low... good luck to all

 
At 12:24 PM, Blogger Melody said...

Good read:

How can low-income people afford $ 500,000 homes?

http://www.nbc5.com/news/4453356/detail.html?rss=chi&psp=news

 
At 12:29 PM, Blogger Melody said...

Danielle DiMartino:
Fallout is likely from excess debt
http://www.dallasnews.com/sharedcontent/dws/bus/columnists/all/stories/050905dnbusdimartino.8bd66556...

EXCERPT:

Let me summarize.

•More Americans than ever are overpaying for their homes.

•Thanks to the loosest lending standards ever, they are borrowing more against the homes than ever thought possible.

•To add insult to interest rates, households are breaking out the credit cards at triple the rate of two years ago to outfit these overpriced mansions.

If excess debt is what leads to depressions, we could indeed be in for some tough times

 
At 12:42 PM, Anonymous Anonymous said...

Given that the "last straw" tends to be a change in crowd psychology, I'm guessing the bankruptcy reform will be what puts an end to this mania. I'm just surprised they didn't have it take effect immediately, the better to secure their gains.

 
At 12:46 PM, Anonymous Justin said...

One-month LIBOR and the two-year swap rate increased from 1.09% and 1.88%, respectively, at March 31, 2004 to 2.87% and 4.19%, respectively, at March 31, 2005 while the weighted average coupon on our nonconforming originations and purchases for the three months ended March 31, 2005 was 7.6% as compared to 7.4% for the same period in 2004.

Ok Somebody please explain to me what "weighted average coupon on our nonconforming originations and purchases" is. My guess is is this is what they pay holders of these mortgage backed securities. So that means that they must be getting paid more than 7.6% interest from borrowers on all their mortgages. Who is paying more than 7.6% for a mortgage these days? Deep subprime? How does this work? Thanks.

 
At 1:23 PM, Anonymous Anonymous said...

Vise, not vice--unless you meant it as (good) pun.

 
At 6:58 PM, Anonymous boulderbo said...

justin,

on weighted average coupon at 7.6%, that is not out of whack at all. you have to remember that most originations that novastar does are on 2/28 or 3/27 basis, locked by a prepayment penalty and adjusted against the libor. the creditworthiness of the borrower is not anything that you would want to lend on. a good friend of mine is short nfi big time, if you read between the lines investors are buying the stock because of a 15%+ yield but is built on a house of cards. we sell mortgages to nfi and they up to their ass in questionable loans. more importantly, they have "credit enhancements" to cover their securitizations (or allow them to occur), primarily private mortgage insurers. guess what- misrepresentation is not covered by pmi, guess what- better than half of their loans are stated income (read misrepresentation) loans. the lawyers are gonna have a field day with nfi and others if the market tanks.

 

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