by Tanta on 4/30/2007 10:10:00 AM
Monday, April 30, 2007
For reasons I do not fully understand--I am just a mortgage punk, you know--AHM has lowered guidance for the second time in about a month, while it reports that the problems are stabilizing.
While I am disappointed by our company’s results, our company will always be susceptible to significant disruptions in the secondary mortgage market. It does appear that the secondary market is stabilizing. During April, more loan buyers have been bidding to buy our loan pools. Additionally, spreads on some junior mortgage securities have retraced a portion of the sharp widening that occurred in March, junior mortgage securities are trading in a more orderly fashion, and the ABX index is off its lows. We will have to see how market conditions develop as the year progresses. For now, however, our company’s working assumption, which is incorporated into our earnings guidance, is that our gain on sale margins, excluding delinquency related charges, will continue near the low levels we experienced during the first quarter.
While our company remains susceptible to disruptions in the secondary mortgage market, we can and have taken actions to reduce our delinquency related charges. It is important to note that most of our company’s delinquency related expenses are not due to delinquency in our portfolio, but instead result from early payment defaults on loans sold that we were required to repurchase, or on loans we hold pending sale. Indeed, 87% of the first quarter’s delinquency related charges stem from our loans held for sale, not our portfolio. Moreover, the vast majority of our delinquent loans held for sale are due to our previously offering a particular type of product, namely stated income loans where a high portion of a home’s value is borrowed. These types of loans have accounted for approximately 15% of our loan production, but resulted in 73% of our delinquent loans held for sale at March 31, 2007.
Our company discontinued offering the high loan-to-value, stated income loans that resulted in the great majority of our delinquency related charges, generally in late February. As a result, our company is now in a “tail” period that will include repurchasing loans that were recently sold and are still inside the period in which our sale is subject to repurchase, which is usually three months. As the tail period winds down, our company’s delinquency related charges should begin to diminish.
During the first quarter, our company’s delinquency related charges were increased both due to reserving for new delinquencies and due to reserving because we increased the loss severity assumption for all delinquent loans held for sale. Increased severity assumptions are due to ongoing weakness in home prices and long home marketing periods. This change in assumptions is the reason first quarter delinquency related charges were disproportionately greater than increases to delinquent loans held for sale. During the first quarter, our company increased the loss severity assumption associated with our contingent reserve for repurchases.
One bright note for the first quarter and for April of 2007 is that our loan application volume remains reasonably strong despite our no longer offering those products that resulted in higher delinquency. Our application volume appears to be benefiting from reduced competition and strong demand for refinancing. Based on current application run rates, our 2007 loan production volume guidance of $68 billion to $74 billion remains unchanged.
So the bright note is that AHM is picking up the apps that used to go to the real nuts, who are now out of the market, plus all those folks who really, really need a refi about now? 'Kay.
Posted by Tanta on 4/30/2007 10:10:00 AM