by Anonymous on 9/18/2007 09:47:00 AM

Thanks to Clyde, we see that Morgan Keegan is having a wee bit of a problem filing a report. Oh, Mommy, will those subprime bonds ever stop being so hard to price?

This, however, is classic:

The lack of liquidity in the fund's securities could result in the fund incurring greater losses on the sale of some its securities than under more stable market conditions, Morgan Keegan said in the supplement filing.

How true. Back when the market was "stable" enough to let us all lever up twenty times, this kind of thing didn't happen.

by Anonymous on 9/18/2007 09:25:00 AM

LEND finally got around to filing a 10-Q today for Q01. It's jam-packed with exciting self-serving revisionist history masquerading as opening the kimono. I recommend it to connoisseurs of first-rate HorseHockey™.

Lowlights:

In the third quarter of 2006, the non-prime mortgage market in which the Company operates was characterized by increased competition for loans and customers which simultaneously lowered profit margins on loans and caused lenders to be more aggressive in making loans to relatively less qualified customers. By the end of 2006, the non-prime mortgage industry was clearly being negatively impacted. The sustained pricing competition and higher risk portfolios of loans reduced the appetite for loans among whole loan buyers, who offered increasingly lower prices for loans, thereby shrinking profit margins for non-prime lenders. In addition, the higher levels of credit risk taken on by non-prime lenders resulted in higher rates of delinquency in the loans held for investment and in increasing frequency of early payment defaults and repurchase demands on loans that had been sold. These trends accelerated during the first quarter of 2007, and the industry experienced a period of turmoil which has continued into the second and third quarters of 2007. As of August 31 2007, more than 55 mortgage companies operating in the non-prime mortgage industry had failed and many others faced serious operating and financial challenges. The most notable of these failures is New Century Mortgage Corporation (“New Century”), one of the largest non-prime originators in recent years, which filed for bankruptcy protection in April 2007.

It now appears that an underlying reason for the deterioration of industry conditions was the relatively poor performance of loans originated in 2006 in comparison to loans originated in 2004 and 2005. While real estate markets were booming during 2004 and 2005, and some areas experienced significant home price appreciation, many originators extended credit and underwriting standards to meet market demands. When home price appreciation leveled off, or in some areas declined, many of the loans originated in 2006 did not perform up to expectations. This decline in performance led to increases in the cost of securitizing non-prime loans as the rating agencies which rate non-prime securitizations increased loss coverage levels, requiring higher credit support for non-prime securitizations.

Yeah, the funny business just happened to happen in Q04 06, which made it visible in Q01 07, which just happens to be the point at which LEND suddenly discovered that it could no longer prepare financial statements. Funny how that works.

At minimum, may we remind everyone that the 2005 subprime mortgage vintage was on track to become the Worst Ever until . . . you know . . . we had data on 2006?

by Anonymous on 9/18/2007 08:18:00 AM

Daytraders and global stuffees bail out real estate specuvestors! Or something. (Hat tip Turbo, who observes that the TEOTWAWKI has been postponed another quarter):

Sept. 18 (Bloomberg) -- Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed bonds, said profit fell less than expected as fees from equities trading and investment banking offset some losses from subprime home loans.

Net income fell 3 percent to $887 million, or $1.54 a share, in the third quarter from $916 million, or $1.57, a year earlier, the New York-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was $1.48 a share.

Chief Executive Officer Richard Fuld's efforts to reduce the reliance on fixed income by expanding stock trading and merger advice solidified earnings as contagion in the credit markets spread, led by defaults among home-loan borrowers with poor credit histories. Lehman is cutting about 2,000 mortgage-related jobs. Revenue from equities jumped 64 percent to $1.37 billion.

by Anonymous on 9/18/2007 07:38:00 AM

Bloomberg reports:

MT. LAUREL, N.J. - PHH Corp., the mortgage lender that agreed to be bought by General Electric Co. and Blackstone Group LP, said the $1.8 billion sale could unravel as lenders back away from some leveraged buyouts.

JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. told Blackstone they might fall $750 million short in funding its part of the deal, PHH said Monday. GE, which plans to keep the company's vehicle-leasing unit, might pull out if Blackstone can't get financing. . . .

PHH is the second company in a week to warn that an LBO could be derailed as banks seek to renege on lending commitments for smaller buyouts while sticking with big deals such as Kohlberg Kravis Roberts & Co.'s $26 billion takeover of First Data Corp. Reddy Ice Holdings Inc. said last week that Morgan Stanley might back out of selling debt for GSO Capital Partners LP's purchase of the company.

"There will be some deals that won't get done, but it won't be the big names," said billionaire financier Wilbur Ross, whose New York-based WL Ross & Co. invests in distressed companies. "Some of the smaller deals have better escape hatches." . . .

"We continue to hope that Blackstone will succeed in arranging its financing so the merger can be completed," said Stephen White, a spokesman for Fairfield, Conn.-based GE. "But if Blackstone is unable to complete its purchase, GE will not be obligated to complete the merger."

In March, GE agreed to buy PHH and resell the mortgage unit to New York-based Blackstone, manager of the biggest buyout fund. PHH said Monday it told GE that it expects the company to "fulfill its obligations under the merger agreement."

In case you happen to be curious about it, PHH was once an independent company that got sucked into the Cendant conglomeration of "affiliated businesses," mixing mortgages and real estate sales and all kinds of other stuff. Then after the spectacular accounting fraud at Cendant, PHH got "spun back" to being an independent company, until GE saw a flip an investment opportunity early in the year.

PHH is a big mortgage originator, although you might not realize that because a huge chunk of its business is "private label outsourcing" of one kind or another. Lots of smaller banks and credit unions, for instance, and a few larger financial firms like AmEx use PHH to originate and service loans under a "private label" arrangement that is opaque to the consumer. PHH will, for instance, issue a separate phone number to Little Dog Bank's "mortgage department," which will be given to Little Dog's customers. When they call, the PHH reps answer "Little Dog Bank, how may I help you?" or words to that effect. So a lot of what goes on that looks like "retail" lending is actually running through PHH's fee-for-service outsourcing operations. So is a lot of "direct lending," insofar as PHH's private label clients offer their own customers a "loan by phone" option that involves calling PHH-in-drag. There can be loans brokered to Little Dog that are really closed by PHH pretending to be Little Dog Wholesale. You would need Visio more than you would need Excel.

The whole point of this, besides making it less expensive for a Little Dog or a financial services company like AmEx that doesn't primarily originate mortgages to "originate" mortgages, is the "branding" part, which involves either "seamless customer service" or "endless opportunities to sell you more stuff," depending on which PR you are reading. For a lot of outfits, the mortgage loan itself isn't the "profit center": it's the other accounts or insurance policies or what have you that can be "cross-sold" to people with mortgage loans. Alternately, the ability to offer these "private label" mortgages is a way to hang onto depositors or other account-holders who want all their accounts, including their mortgage, at one place. Of course they aren't all at one place; they look like they're all at one place. Which is why putting it all at GE, which once apparently made lightbulbs and has been in and out of the mortgage business more times than the set changes at Phantom of the Opera, makes perfect sense. If only the credit markets saw it that way.

by Calculated Risk on 9/17/2007 05:29:00 PM

From Bloomberg: Bank of America Sees `Meaningful Impact' From Turmoil (hat tip ShortCourage)

Bank of America Corp., the second- biggest U.S. bank, said ``unprecedented dislocations'' in credit markets will have a ``meaningful impact'' on third-quarter results at its corporate and investment bank.

Trading and other areas of Bank of America's capital markets and advisory services unit are ``being adversely affected by all of these conditions,'' Chief Financial Officer Joe Price told investors at a conference in San Francisco today. He cited stress on subprime mortgages and in the commercial paper market as being especially severe.

``These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months,'' Price said.

The confessional is now open.