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The Sub-Prime Time Bomb Detonated Today

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By RodgerRafter
August 10, 2006

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Take a look at today's performance for publicly traded sub-prime lenders:

LEND -17.24% (lowered earnings guidance by about $3 per share)
IMH -11.31% (somebody goofed and filed the 10-Q an hour early)
AIC -10.85% (being acquired by LEND)
NEW -6.22%
NFI -3.82%
DFC -2.03%
ECR -2.44%
SAX +26.16% (being acquired by Morgan Stanley, just in time to save somebody's behind, as earnings stunk as badly as the rest of them)

These upstart lenders fueled the housing bubble by loaning far-more-money-than-they-could-ever-pay-back to people-who-never-should-have-been-buying-homes. It was only a matter of time before defaults got rolling to the point that the sub-prime lenders took a big hit on earnings. Of course it will get much worse from here. The rebalancing process is only just beginning.

From listening to the Accredited Home Lenders conference call it seems clear that LEND and other sub-prime lenders are getting squeezed on multiple fronts:

1. Competitors from Alt-A have gone from 680+ down to 620 FICO, muscling in on LEND's sweet spot.
2. The secondary market for High LTV, Stated income, and low FICO has dried up. Investors don't want the garbage anymore.
3. In 2005 they relaxed standards and are now seeing more defaults. They've decided to tighten up some.
4. Sales people quit at LEND because they were pushing quality and margins. Salespeople are getting big bonuses at small upstart companies. The execs wouldn't answer the question as to whether the upstarts are private equity funded.

LEND is being forced to repurchase bad loans they had previously sold to investors. If a loan defaults in the first year or so, the investor can make them buy it back. This is also true for loans where there's obvious fraud. It seems that the investors are quick to find reasons to send problem loans back to LEND. These don't show up on losses, but instead get resold at a discount and cut into margins of new sales. LEND thinks this trend will wind down by the end of the year. I think its just beginning.

From LEND today: "Delinquent loans (30 or more days past due, including foreclosures and real estate owned) were 3.76% of the serviced portfolio at June 30, 2006, compared to 2.47% at December 31, 2005 and 1.79% at June 30, 2005."

From AIC today:
"Percentage of delinquent loans serviced (period end)"
June 2006: 8.2%
December 2005 5.4%

From SAX today:


($ in thousands)        June 30, 2006  March 31, 2006   June 30, 2005
--------------- --------------- ---------------
Principal Principal Principal
balance % balance % balance %
--------- ----- --------- ----- --------- -----
30-59 days past due $370,309 5.53% $273,044 4.20% $307,766 5.04%
60-89 days past due $ 92,635 1.38% $ 82,061 1.26% $ 83,148 1.36%
90 days or more past
due $ 72,494 1.08% $ 58,311 0.90% $ 46,542 0.76%
Bankruptcies (1) $121,559 1.81% $128,280 1.97% $126,391 2.07%
Foreclosures $127,185 1.90% $118,140 1.82% $105,782 1.73%
Real estate owned (2) $ 53,234 0.79% $ 50,039 0.77% $ 41,972 0.69%
Seriously delinquent %
(3) $435,268 6.50% $397,474 6.12% $367,013 6.01%

From IMH today:
"60+ day delinquency of mortgages owned"
June 30, 2006 = 4.16%
December 31, 2005 = 3.12%
June 30, 2005 = 2.01%

The tide has turned for the American consumer, and sub-prime borrowers are feeling it the worst.

Here's what I posted about the Sub-prime lenders back on 12/26/05:

This message has also been blogged here:

just in case anyone wants to link it outside the fool.

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