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."