An anxious stock market, always looking for the next subprime related Blowup, has been providing the mortgage industry whiplash. Thornburg Mortgage (TMA), for example, fell 47% on Tuesday and then was back up to 39% next day.
There is no doubt things are looking terrible in the mortgage industry. But there is a lively debate about how terrible. Analysts, investors and executives agree that the mortgage company is the next trip and to fall into bankruptcy.
As Keefe, Bruyette & Woods analyst Frederick Cannon wrote this week, the main lenders “are in a crisis mode.” The decline in housing industry means fewer mortgages to get started. An increasing number of Americans can not make payments on their mortgages, subprime loans and other types, causing an increase in delinquencies and defaults. They can not refinance, both by value of the house has been reduced and because the Fed has not cut interest rates.
Those are all reasons for concern, but the most immediate concern for businesses of mortgages is the horrendous conditions in the secondary market.
The market share of mortgage-backed securities are essentially frozen, which means that investors are unwilling to buy mortgage debt at all.
That’s bad news for stand-alone mortgage companies like American Home Mortgage (AHMIQ) (which recently declared bankruptcy), because re-sale of debt on the secondary market is how these companies raise cash to continue making loans .
But what about companies like Thornburg Mortgage, a real estate investment trust or REIT, which tends to buy and maintain high quality of the loans? Or Countrywide Financial (CFC), the industry giant that is expanding rapidly to take over market share, while smaller and weaker rivals disappear?
Thornburg shares fell by nearly half when the company said it was delaying the payment of dividends for one month. The move was designed to save cash to meet its creditors demands. A similar move by American Home Mortgage preceded bankruptcy a few days. Jefferies analyst Richard B. Shane reacted to the news writing: “Given the serious liquidity crisis, we do not recommend investors hold shares of TMA at any price.”
On Wednesday, Thornburg shares returned after executives said that bankruptcy is not in the cards. “I’m hopeful by the end of this week we will be completely out of this situation,” President Larry Goldstone told CNBC.
It is true that Thornburg is different from other mortgage brokers. Their “loan portfolio is very high quality,” wrote Shane.
However, it does depend on the debt leverage of 12 to 1 on certain lines of credit. The hard secondary market that make it hard for Thornburg if, for whatever reason, the company needed to liquidate its portfolio to raise cash. And it may need cash to pay its creditors or dividends because the word in debts. “We believe that the sustainability of the company is currently subject to the whims of Wall Street lenders,” wrote Shane.
“Given this uncertainty,” AG Edwards (AGE) analyst Greg Mason wrote Wednesday, “we choose not to play guessing games.” (Thornburg is a client of AG Edwards investment banking.)
Countrywide is a company quite different from Thornburg, but is also a subject to the whims of its creditors and the secondary market. Its stock plunged on Wednesday afternoon, compared to 13% for the day to unconfirmed reports that the company was having trouble borrowing money. Volume of trade activities in the country is six times the normal daily Standard & Poor’s equity analyst Stuart Pless said, “that leads us to believe that some of the major institutional holders are selling shares.”
Apparently, financially strong and making efforts to boost the reality of its loan originations, the country is the “supermarket” of mortgage lenders offering mortgages from a wide variety of qualities. The company also owns a bank, whose deposits give more stability than other mortgage companies.