New Century is also being forced to repurchase previously packaged and sold loans to investors. The firm essentially sold the loans at a premium for cash, which makes sense, but still had responsibility for any future deterioration of credit quality, which does not make sense. New Century’s stock price is down approximately 45% year-to-date [YTD] after a slight gain last year and a significant drop in 2005.
The same article in the Forbes states that 42% of the mortgage portfolio of Countrywide Financial (CFC) is pay-option adjustable-rate mortgages, which means “borrowers decide each month how much to repay and can face negative amortization of the loan.” Countrywide is the largest originator of sub-prime mortgages and is stronger financially, but deterioration of credit quality from 0.24% delinquencies in 2005 to 0.67% in 2006 will pressure the company.
The stock prices of some other mortgage lenders have also decreased dramatically. For example, Novastar Financial (NFI) is down approximately 62% YTD, following a significant drop in 2005 and a slight gain in 2006. The stock price of Fremont General (FMT) is down 18% YTD after losses in 2005 and 2006.
Some of these companies also have extraordinary dividend yields. The yield of Novastar is ~56% while New Century is ~42%. Both will most likely be reduced in the future.
With credit quality deteriorating (approximately 1 in 10 sub-prime mortgages defaulted by the end of 2006), investors forcing the repurchase of packaged loans and reducing purchases of new ones, a slow down in originations, lawsuits, and interest rates trending up, only the strongest lenders will survive.
A blog titled, The Mortgage Lender Implode-O-Meter, lists 23 sub-prime lenders that have gone bankrupt since December 2006. I expect more will do so.
NEW vs. FMT vs. NFI vs. CFC 1-yr chart