Stock of the Day
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Accredited Home Lenders (LEND)
Accredited Selling $2.7bn in Loans to Boost Liquidity
Good news for a sub-prime mortgage company? Is that possible? Sort of. Accredited Home Lenders, a San Diego-based lender hit hard by Gray Tuesday's (February 27) attack on the industry, indicated that it would sell $2.7bn worth of its loans. The move, which is expected to give the company some wiggle room and let it fix its finances, sent the stock up 30% in morning trading. While the news might be considered a bright spot on an otherwise cloudy horizon, does this mean that sub-prime lenders are out of the woods? Not just yet.
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| Stock Analysis |
March has not been a good month for sub-prime mortgages. Market news revolves around the dire straits of this industry like a moth to a flame, and it is unlikely that a shift away from this will occur in the near future. With so many different companies invested in the riskier, hence sub-prime, mortgages, and with lending practices somewhat lax, it may have been inevitable that the markets would correct their take. While this is well and good, tell it to investors. Shares of Accredited had been hovering from $25-30 since mid-December, but were far below early 2006 levels that saw them at a high of $57.79. By early February the company had closed a $760m asset-backed securitization deal and was up to $29...then something happened. First, Accredited reported a 4Q of $37.8m. The loss was three times larger than Wall Street had estimated, and was coupled with the company's troubles with rising loan payment delinquencies from its borrowers with poor credit histories. A week after this bit of news Moody's indicated that it might downgrade the company's rating, dropping stock prices nearly 4%. From February 20 to March 6 the shares had fallen by more than 30%, followed by an additional 75% freefall from March 9-13. Things were not looking up.
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In the midst of the sub-prime rancor and sell off, Accredited was facing a liquidity crisis. Since the company focused on a riskier loan market, it was forced to buy back a lot of the loans it issued, effectively sucking up its cash reserves. Future revenues were expected to decline 2Q 2006 levels. Earnings per share (EPS) was expected to halve by 3Q 2007. While it would meet margin calls - to the tune of $190m, it would have to tap into credit lines and possibly start firing employees to trim costs. Rival New Century was de-listed from the NYSE after its shares lost nearly all of their value. Something was going to have to give, especially after analysts indicated that they did not see the company turning a profit in the near future. Then came Friday's news of a loan sale.
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The $2.7bn sale of troubled loans by Accredited has taken the company out of the dark, at least temporarily. The sale represents a deep discount on nearly the entire portfolio as the company tries to cut losses amid rising defaults and the $190m margin call mentioned earlier. While this is good news, the company still relies on the sub-prime market for sales, which means that unless it decides to focus on a different, and potentially more competitive segment of the mortgage market, that the overall health of the sub-prime market is going to weigh heavily on future revenues. The money does, however, give the company some time to come up with a better long-term strategy when it comes to the market. This could include tightening restrictions on the amount of loans issued, but this is certainly not the limit.
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Does this mean that Accredited is out of the woods? Not just yet. While the past week has been a big turnaround, investors holding the company since January are still down nearly 60%. The company, which was still in a free-fall like state as of March 13th as it dropped 85%, rebounded to be only down 53% for the past month. For new investors looking to pick up a potential value: be wary. There is still a lot of uncertainty surrounding the sub-prime market, and there could be new developments that will either boost or bash Accredited and the entire industry. Investor sentiment, at least in the short-run, has been semi-positive, yet skeptical. Sub-prime, or second tier, lending, which is priced to risk, used to be viewed by larger investment houses as a way to diversify mortgage-backed portfolios. With rising defaults the risk levels has increased substantially, while at the same time cutting down on growth.
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Profile |
The Company's principal activity is to provide mortgage banking services. It originates, finances, sells, securitizes and services non-prime mortgage loans secured by residential real estate. The Company focuses on borrowers who do not meet conforming underwriting guidelines due to higher loan-to-value ratios. It originates loans primarily through approved and licensed independent mortgage brokers. As of 31-Dec-2003, the Company had a network of 6,800 independent brokers throughout the United States. The Company also operates Axiom Financial Services and Home Funds Direct, which originates direct-to-consumer loans.
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