Tuesday, 21 August 2007

Red ink spreads

First we saw homebuilders drawing red ink writing down over-inflated land prices in 2Q07. Now we see it moving to mortgage brokers - the results of which will show up in 3Q07. That's not to say the baton has been passed the homebuilders will continue to do it tough.

Thornburg loses $930M unwinding portfolios

Thornburg Mortgage Inc. said on Monday that it lost roughly $930 million selling billions of dollars worth of AAA rated mortgage securities, while reducing borrowing and unwinding interest-rate hedges.

The company sold approximately $20.5 billion of primarily AAA rated mortgage-backed securities. That cut its mortgage asset portfolio to roughly $36.4 billion at the end of last week, down from $56.4 billion at June 30.

Thornburg also reduced its reverse repurchase and commercial paper borrowings from $32.9 billion at June 30, 2007 to roughly $12.4 billion on Aug. 17. That should limit its exposure to future margin calls on short-term borrowing, the company noted.

Thornburg also unwound roughly $41.1 billion of interest-rate hedging instruments, it reported.

Thornburg estimated that it will realize a third-quarter capital loss of roughly $930 million from the sale of the mortgage securities. Of this total, $700 million was already reflected as an accumulated comprehensive loss on the company's consolidated balance sheet June 30.

The company said it realized a net gain of approximately $40 million from terminating interest-rate hedging instruments.

Remember this is a company with one of the highest quality mortgage portfolios in the business.

Capital One falls 5% in late trading
Credit card giant closes wholesale mortgage unit, cutting 1900 jobs

SAN FRANCISCO (MarketWatch) -- Shares of Capital One Financial Corp. fell 5% during Monday's late-trading session after the giant credit-card company said it was closing its wholesale mortgage unit, cutting 1,900 jobs.

Capital One shares dropped 5% to $63.38. The company said it will immediately stop originating mortgages through its GreenPoint Mortgage business, which offers loans through brokers.

The company also said it will close GreenPoint's California-based headquarters along with 31 locations across 19 states. That will mean the elimination of roughly 1,900 jobs, most of which will go by the end of 2007, Capital One (COF) said.

Capital One said it estimates the total after-tax charge associated with the closures will be about $860 million, or $2.15 a share. The company said it now expects 2007 earnings of about $5 a share. Without the charges related to the mortgage banking business, the company said it would have maintained its existing earnings outlook. Analysts polled by Thomson Financial are currently looking for per-share earnings of $7.05 for the year.

"Current conditions in the secondary mortgage markets create significant near-term profitability challenges," Capital One said in a statement. "Further, recent and continuing developments in the mortgage markets reduce the long-term outlook for profitability in the business, as the company expects markets for prime, non-conforming mortgage products are likely to remain challenged."
That's a 30% downgrade to full year earnings. Analysts are going to be scrambling to catch up with the amount of downgrades to earnings to come through as the red ink spreads through the financial sector.

The extent to which major financial company earnings will be hit is yet to come out. When they do the supposed 'bargains' will no longer look cheap and the argument that stocks are not overvalued on a relative basis (which is flawed anyway - I'll post more on that later) will lose its appeal.