However, in response to the level of early-payment defaults and loan repurchases, as well as changing secondary market demand for certain products and product changes likely to be required by regulatory authorities, we have intensified our focus on tightening our underwriting guidelines and taking other steps to further improve fraud detection and risk management. While we expect the impact of these developments to be partially offset by our growth initiatives, including the roll-out of our Alt-A product through our Wholesale channel, we no longer expect our loan production to be flat in 2007 compared with the $59.8 billion originated in 2006; rather, our revised outlook for 2007 loan production is to be down approximately 20 percent compared with 2006. Importantly, it is difficult to predict the impact of the steps we continue to take in response to changing market conditions."
Production volume down 20 percent just on tightening guidelines.
Feb. 7 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank, said it's increasing loan-loss provisions for 2006 because mortgages to risky borrowers in the U.S. are going bad faster than the company expected only two months ago.
Provisions will be 20 percent higher than the $8.8 billion that analysts now estimate, London-based HSBC said in an e-mailed statement.
``It is clear that the level of loan-impairment provisions to be accounted for as at the end of 2006 in respect of Mortgage Services operations will be higher than is reflected in current market estimates,'' the bank said in the statement.
HSBC, the world's No. 3 bank by market value after New York- based Citigroup Inc. and Charlotte, North Carolina-based Bank of America Corp., bought Household International Inc. for $15.5 billion in 2003. The purchase of the Prospect Heights, Illinois- based company, a lender to consumers with lower-than-average credit ratings, left HSBC more vulnerable a slowdown in house price growth."
The press release says they have $350MM of cash and "liquidity" at 12/31/06, so they burned at least $58MM in Q4. We don't know what they include in liquidity, it could be credit lines which are doubtless unavailable without a waiver since the financial statements "should no longer be relied upon" as the release says.
As dramatic as the New Century news is, the HSBC news is probably even more important. They are increasing their provision by $1.76B - and the prior estimate is only two months old. HSBC is regarded as among the better run banks and is the number 2 subprime lender in the US.
The bottom line is this: Too much money was given to too many people who had NO business buying homes -- or refinancing into high-risk, exotic financing they neither understood nor could really afford. The result is the complete mess we have unfolding before our eyes now. Credit cycles are a real pain in the you know what if you're not prepared.
HSBC Holdings PLC, in an unexpected dose of bad news, said that its U.S. subprime mortgage portfolio was struggling much worse than expected and that charges and provisions for the souring loans will be 20%, or about $1.76 billion.
The hits keep coming. BTW, the additional provision is about $.60 per share before taxes.
"NEW YORK, Feb 6 (Reuters) - Online bank and mortgage lender NetBank Inc. (NTBK.O: Quote, Profile , Research) said on Tuesday it expected to post a much steeper than expected fourth-quarter loss as it moved to shut down its subprime mortgage business.
NetBank had previously forecast an aftertax loss of 74 cents to 87 cents in the quarter, but now expects the result to fall "far below" that estimate, provided on Dec. 18, it said in a regulatory filing.
As a result of its shutdown of the mortgage business, which was completed in the fourth quarter, NetBank has been forced to buy back from investors the loans that were defaulted, leading to $26 million more in provisions than it was expecting, the bank said."
This NEW disclosure is a result of Sarbanes Oxley. Quarterly results are unaudited and no one signs off on them.
Year-end results are audited and require the CFO and CEO to sign under the penalty of perjury that these numbers are authentic. The penalty is not for perjury but for fraud.
It looks like the auditors learned something from Arthur Anderson.
All of these banks cook the books on the ALLL (Allowance for Loan & Lease Loss Reserves). The modern day trick is to not disclose them as delinquent unless they are 90 days in arrears, instead of 60.
And at the 60 day point the lender goes to the borrower with a "modification". The modification is they reduce the interest rate and the payment amount due. They add the owed payment and interest to the negative amortization loan. And presto it no longer shows up as a non-performing asset. This is also known as forebearance.
What happen with NEW is that these are loans that are packaged and sold and that have been "putted" back and need to be written down.
Hopefully the market starts to recognize that the earnings of these companies are fiction.
Specifically, the company did not include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses.
Who woulda thought...
Pesky thing, forgetting to discount non-performing assets. Tisk-tisk. What a minor oversight...
Brian said:
" As dramatic as the New Century news is, the HSBC news is probably even more important. They are increasing their provision by $1.76B - and the prior estimate is only two months old."
This I definately agree with. The difference is that HSBC is a well run bank and had $1.76Billion on hand to add to the already huge default pool. They'll survive. Hurt? Yes. But they'll survive.
NEW? Toast with Coast.
I've become a huge fan of this blog. How many sub-primes have delayed their reporting? NEW, GMAC.. others?
CFC is, as noted on the blog, very high in the credit default swaps... hmmm...
The bottom line is getting your principal back, and that's going to get more and more difficult. Sooner or later this is going to start hitting the hedge funds.
Importantly, the foregoing adjustments are generally non-cash in nature. Moreover, the company had cash and liquidity in excess of $350 million at December 31, 2006.
Non-cash my ass. non cash until they try to dispose of them again, at a discount to face.
I have enough cash to pay off my mortgage now; I am seriously considering becoming a delinquent, and then offering to buy it back from the lender at 50 cents on the dollar. Might screw up my credit rating for a while, but hey -- it's a jumbo....
In my own uneducated view I'm guessing that in a "normal" financial environment the number of restatements would probably mean that we can look forward to more than a few additional sub-prime lenders also biting it and folding up their tents, and maybe a few banks being taken over by the FDIC as the herd was culled. However, what I'm concerned about, as touched on by MaxedOutMama, is what happens to all the derivatives, default swaps and MBS's as these institutions go belly up. The market for these instruments have not really been stress tested yet by a major recession or other negative economic event and a lot of the hedge funds and other big financial players own these things. As I was taught in the one securties class I took, leverage increases the slope (the derivative) of the profit curve. In otherwords, it multiplies the profit when things are good, but also multiplies the loss when things are bad. And both seem to happen faster.
Another day, another sub-prime lender getting tough on guidelines. This time, it's New Century.
In an email titled "Guideline Changes on 1st Time Homebuyers", a New Century employee advised that effective immediately, New Century will no longer allow first-time homebuyers to finance more than 90% of a home's value if their income documentation is considered "W-2 Stated".
"W-2 Stated" means that the borrower's income is not verified by the underwriter and the borrower is a full-time employee somewhere.
W-2 Stated is very different from "Self-Employed Stated". When people are S/E Stated, it's usually because their income taxes include write-offs associated with their business. This makes their reported income calculate lower their actual income.
With W-2 Stated, it is generally the exact opposite. Applicants (and their brokers/bankers) usually state their income higher than their actual income in order to help them qualify for loans.
This is a practice that is drawing scrutiny in Congress right now.
According to the email, New Century is making this change because W-2 Stated loan "are not performing well".
Andrew,
The Credit Derivatives market is now being run largely via individual Excel spreadsheets and lots of phone calls to clear transactions. The process is tedious and error prone. Moreover, in the event of bankruptcies of key trading partners, the market might fall into chaos.
An automated system is probably in stage of implementation, but it's not in place at this time.
20/20 hindsight but NEW's dec $7 million provsion for returned loans looks optimistic for a firm doing $48 billion in sales. Guess KPMG wants a bit more this year.
HSBC has over a trillion dollar in asset -- so the change upped provision by less than 0.2% of total asset. That is noise.
If all that rise in loss provision come from subprime lending in the US, that would say a lot about the state of the subprime lending.
Still, life goes on and subprimes still have to borrow. Bad news for NEW should be good news for banks that do a lot of subprimes. Less competition should increase the spread. And banks don't have to worry about liquidity freeze. REITs have proved that subprimes can be very profitable before too many players spoiled the party. Too bad for them that liquidity is not that easy to come by for REITs. Though it is interesting that NFI still trades above book.
HZ,
What are you reading? HZ has about $174B in Assets and $154B in Liabilities. That's $20B Net Assets. Their Income looks to be about $2.5B.
Sorry to be picky, but could you briefly proofread your posts? The sentence structure just gave me a headache.
I was coming over here to post this link. Tanta is on top of it.
Clearly this is good news?!?!?
Stock is down 9% after hours.
It's now down 16%, $25 bid
Brian, is there any public site to have after-hours quotes? I was using yahoo.com, they have NEW down 9%...
Why no layoffs announced? Indy did.
Anyone buying Puts on FED? That lender is at a 52 week high and 72% of earnings are from POA.
That's a bid on Instinet, spread is now 25.25/25.50
Does anyone know a responsible lender? It would be interesting to see if their stock price moves lower with the rest.
Do you think they might reconsider that tag line they use for branding - "A new shade of blue chip"
"Another one bites the dust"- Quee
Yahoo tells me that NEW has(d) $408M of cash, but they are lending billions. Just one mistake and they are gone.
Yahoo tells me that NEW has(d) $408M of cash, but they are lending billions. Just one mistake and they are gone.
However, in response to the level of early-payment defaults and loan repurchases, as well as changing secondary market demand for certain products and product changes likely to be required by regulatory authorities, we have intensified our focus on tightening our underwriting guidelines and taking other steps to further improve fraud detection and risk management. While we expect the impact of these developments to be partially offset by our growth initiatives, including the roll-out of our Alt-A product through our Wholesale channel, we no longer expect our loan production to be flat in 2007 compared with the $59.8 billion originated in 2006; rather, our revised outlook for 2007 loan production is to be down approximately 20 percent compared with 2006. Importantly, it is difficult to predict the impact of the steps we continue to take in response to changing market conditions."
Production volume down 20 percent just on tightening guidelines.
"Production Volume" won't matter well before the end of the year.
Is this old news?
HSBC Says Bad-Loan Charges to Exceed Analysts' Estimates by 20% - Bloomberg.com
"HSBC Says Bad-Loan Charges to Exceed Analysts' Estimates by 20%"
By Christine Harper
Feb. 7 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank, said it's increasing loan-loss provisions for 2006 because mortgages to risky borrowers in the U.S. are going bad faster than the company expected only two months ago.
Provisions will be 20 percent higher than the $8.8 billion that analysts now estimate, London-based HSBC said in an e-mailed statement.
``It is clear that the level of loan-impairment provisions to be accounted for as at the end of 2006 in respect of Mortgage Services operations will be higher than is reflected in current market estimates,'' the bank said in the statement.
HSBC, the world's No. 3 bank by market value after New York- based Citigroup Inc. and Charlotte, North Carolina-based Bank of America Corp., bought Household International Inc. for $15.5 billion in 2003. The purchase of the Prospect Heights, Illinois- based company, a lender to consumers with lower-than-average credit ratings, left HSBC more vulnerable a slowdown in house price growth."
The press release says they have $350MM of cash and "liquidity" at 12/31/06, so they burned at least $58MM in Q4. We don't know what they include in liquidity, it could be credit lines which are doubtless unavailable without a waiver since the financial statements "should no longer be relied upon" as the release says.
I should have shorted more.
It will go belly up before the liquidity falls to $0. Nobody in his right mind will lend them a cent.
It can happen in days, weeks or months ...
Nikki, it's news to me. And very relevant. Thank you.
According to ml-implode.com, HSBC and New Century are the #2 and #3 subprime lenders in the US, respectively. Ouch.
Now down 18.7%
Now, HSBC increased their provisions by 20% of $8.8bn.
Check what would happen to NEW if they had to do the same ... (and they probably have to do a higher % though on a bit lower volume).
They gone, sooner or later.
As dramatic as the New Century news is, the HSBC news is probably even more important. They are increasing their provision by $1.76B - and the prior estimate is only two months old. HSBC is regarded as among the better run banks and is the number 2 subprime lender in the US.
The bottom line is this: Too much money was given to too many people who had NO business buying homes -- or refinancing into high-risk, exotic financing they neither understood nor could really afford. The result is the complete mess we have unfolding before our eyes now. Credit cycles are a real pain in the you know what if you're not prepared.
HSBC Holdings PLC, in an unexpected dose of bad news, said that its U.S. subprime mortgage portfolio was struggling much worse than expected and that charges and provisions for the souring loans will be 20%, or about $1.76 billion.
Gee, I guess no one dialed New Century's integrity hotline to let them know something was wacky in the underwriting department.
The hits keep coming. BTW, the additional provision is about $.60 per share before taxes.
"NEW YORK, Feb 6 (Reuters) - Online bank and mortgage lender NetBank Inc. (NTBK.O: Quote, Profile , Research) said on Tuesday it expected to post a much steeper than expected fourth-quarter loss as it moved to shut down its subprime mortgage business.
NetBank had previously forecast an aftertax loss of 74 cents to 87 cents in the quarter, but now expects the result to fall "far below" that estimate, provided on Dec. 18, it said in a regulatory filing.
As a result of its shutdown of the mortgage business, which was completed in the fourth quarter, NetBank has been forced to buy back from investors the loans that were defaulted, leading to $26 million more in provisions than it was expecting, the bank said."
Business & Financial News, Breaking US & International News | Reuters.com
This NEW disclosure is a result of Sarbanes Oxley. Quarterly results are unaudited and no one signs off on them.
Year-end results are audited and require the CFO and CEO to sign under the penalty of perjury that these numbers are authentic. The penalty is not for perjury but for fraud.
It looks like the auditors learned something from Arthur Anderson.
All of these banks cook the books on the ALLL (Allowance for Loan & Lease Loss Reserves). The modern day trick is to not disclose them as delinquent unless they are 90 days in arrears, instead of 60.
And at the 60 day point the lender goes to the borrower with a "modification". The modification is they reduce the interest rate and the payment amount due. They add the owed payment and interest to the negative amortization loan. And presto it no longer shows up as a non-performing asset. This is also known as forebearance.
What happen with NEW is that these are loans that are packaged and sold and that have been "putted" back and need to be written down.
Hopefully the market starts to recognize that the earnings of these companies are fiction.
Crispy, you might find this of interest. ARMed And Dangerous?
Tho bottom line on all these institutions is it is the return of the principal not the return on the principal.
With HSBC announcing one would think it might affect the entire space of finanical stocks.
But keep in mind these financial institutions all learned from FNMA that if all else fails just restate your earnings.
Fleckenstein on NEW last month:
Home-loan house of cards ready to fall - MSN Money
Nice job!
Specifically, the company did not include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses.
Who woulda thought...
Pesky thing, forgetting to discount non-performing assets. Tisk-tisk. What a minor oversight...
Brian said:
" As dramatic as the New Century news is, the HSBC news is probably even more important. They are increasing their provision by $1.76B - and the prior estimate is only two months old."
This I definately agree with. The difference is that HSBC is a well run bank and had $1.76Billion on hand to add to the already huge default pool. They'll survive. Hurt? Yes. But they'll survive.
NEW? Toast with Coast.
I've become a huge fan of this blog. How many sub-primes have delayed their reporting? NEW, GMAC.. others?
CFC is, as noted on the blog, very high in the credit default swaps... hmmm...
Meltdown?
Reminds me
Got popcorn?
Neil
The bottom line is getting your principal back, and that's going to get more and more difficult. Sooner or later this is going to start hitting the hedge funds.
I just took a quick look at Accredited Home Lenders' financials. The hottest IPO of 2003!
What a dog! It's a woofer!
Non-cash my ass. non cash until they try to dispose of them again, at a discount to face.
I have enough cash to pay off my mortgage now; I am seriously considering becoming a delinquent, and then offering to buy it back from the lender at 50 cents on the dollar. Might screw up my credit rating for a while, but hey -- it's a jumbo....
So, for clueless lurkers such as myself... what will be the consequences of all these restatements etc.?
NFI has given back a good chunk of today's sizzling short-covering rally AH. This may be why:
- Herb Greenberg - MarketWatch
In my own uneducated view I'm guessing that in a "normal" financial environment the number of restatements would probably mean that we can look forward to more than a few additional sub-prime lenders also biting it and folding up their tents, and maybe a few banks being taken over by the FDIC as the herd was culled. However, what I'm concerned about, as touched on by MaxedOutMama, is what happens to all the derivatives, default swaps and MBS's as these institutions go belly up. The market for these instruments have not really been stress tested yet by a major recession or other negative economic event and a lot of the hedge funds and other big financial players own these things. As I was taught in the one securties class I took, leverage increases the slope (the derivative) of the profit curve. In otherwords, it multiplies the profit when things are good, but also multiplies the loss when things are bad. And both seem to happen faster.
Oh yeah, and in both scenarios a credit crunch happens for the consumer as their are fewer providers and lending standards get jacked up.
Another day, another sub-prime lender getting tough on guidelines. This time, it's New Century.
In an email titled "Guideline Changes on 1st Time Homebuyers", a New Century employee advised that effective immediately, New Century will no longer allow first-time homebuyers to finance more than 90% of a home's value if their income documentation is considered "W-2 Stated".
"W-2 Stated" means that the borrower's income is not verified by the underwriter and the borrower is a full-time employee somewhere.
W-2 Stated is very different from "Self-Employed Stated". When people are S/E Stated, it's usually because their income taxes include write-offs associated with their business. This makes their reported income calculate lower their actual income.
With W-2 Stated, it is generally the exact opposite. Applicants (and their brokers/bankers) usually state their income higher than their actual income in order to help them qualify for loans.
This is a practice that is drawing scrutiny in Congress right now.
According to the email, New Century is making this change because W-2 Stated loan "are not performing well".
Andrew,
The Credit Derivatives market is now being run largely via individual Excel spreadsheets and lots of phone calls to clear transactions. The process is tedious and error prone. Moreover, in the event of bankruptcies of key trading partners, the market might fall into chaos.
An automated system is probably in stage of implementation, but it's not in place at this time.
Here is today's close on the ABX.
These are bouncing on new lows.
The 2007 class which is one month old is taking it on the chin.
The ABX is a very good leading indicator of how institutions are trying to purchase insurance on their bad block of loans.
Markit Homepage
The stock market is slow to react to what is churning just beneath the surface.
20/20 hindsight but NEW's dec $7 million provsion for returned loans looks optimistic for a firm doing $48 billion in sales. Guess KPMG wants a bit more this year.
KPMG?
Oh, that explains everything.
KPMG is a big accounting firm, he is suggesting that KPMG isn't willing to help cook the books anymore at the price they are currently getting.
Cal,
Cook the books? I don't think there's a partner at KPMG who can microwave a burrito.
HSBC has over a trillion dollar in asset -- so the change upped provision by less than 0.2% of total asset. That is noise.
If all that rise in loss provision come from subprime lending in the US, that would say a lot about the state of the subprime lending.
Still, life goes on and subprimes still have to borrow. Bad news for NEW should be good news for banks that do a lot of subprimes. Less competition should increase the spread. And banks don't have to worry about liquidity freeze. REITs have proved that subprimes can be very profitable before too many players spoiled the party. Too bad for them that liquidity is not that easy to come by for REITs. Though it is interesting that NFI still trades above book.
HZ,
What are you reading? HZ has about $174B in Assets and $154B in Liabilities. That's $20B Net Assets. Their Income looks to be about $2.5B.
Sorry to be picky, but could you briefly proofread your posts? The sentence structure just gave me a headache.
Now I'm doing it. That's HSBC.
Lama,
I don't have even $1B in asset. Talking about proofreading!
If you can't read numbers right, I can't expect to understand my post either.
Just gotsta know; you city folk wear hats?
Tell me, what hat are you tipping? (cap, Bowler, Homberg, etc.)
_Is it just a tug on the baseball cap bill (all the way 'round the head?), or
_Is is a full lift of hat from the head, clearing the head?
.