Banks, REITS, mortgage lenders, and homebuilders

[squiffy]

In general, if interest rates start to rise steadily, one would expect homebuilders, banks, REITs, and mortgage lenders to start dropping, especially as large institutions start shifting their funds to other sectors.

But I am puzzled. CFC is down today to about 85. Which I am glad about as I bought 10 contracts of the 2006 puts at strike 90. So I have made a little money on that trade, about 19% or so. (Doesn't make up for my losses elsewhere, but anyway)

Yet MTG, which in the past has been far more volatile than CFC, is up a bit.

There seems to be some news about mortgages in Mar. being up much higher than Feb., perhaps people trying to lock in rates before they go higher????

But I would think CFC would go up on that news, as they not only service mortgages, but also initiate them????

Anyone know what's going on.

I would expect MTG and CFC to be moving in the same direction on the same news.

[squiffy]

Ahhh. I re-read the company announcement. It says Mar. 2004 mortgage sales up 25% over Feb. 2004.

But Mar. 2004 mortgage sales DOWN 25% compared to Mar. 2003. It's amazing how carefully you have to read these things.

It's been said that CFC will make money even if mortgage sales are down because they service mortgages and have banking operations and other sources of profit.

Nevertheless the market price went down.

If mortgage initiation is a huge source of profit, it's not clear that the other alleged sources of profit will make up for the shortfall.


I hope CFC falls to 50 over the next year or year and a half.

[TimTimSalabim]

Too bad you didn't buy puts on NFI!

[squiffy]

Excellent point. If you think interest rates are going to rise, you should pick out the highest flying lender with the customers least likely to be able to repay!!! Novastar was definitely a put candidate. Though ironically back up 14% today, as we speak.

[adios]

[ QUOTE ]
Excellent point. If you think interest rates are going to rise, you should pick out the highest flying lender with the customers least likely to be able to repay!!!

[/ QUOTE ]

You understand nada about the NFI business model. NFI securiterizes the vast majority of the loans it originates via CMOs (Collateralized Mortgage Obligations) as the vast majority of the resulting MBS is sold. If you can't explain the basics of a how a CMO works then you don't understand the business model. They actually hold very little risky paper in their portfolio. The vast majority of retained paper is AAA (by the bond rating agencies) IO (interest only) which will increase in value in a rising interest rate environment. As long as NFI can add assets to their portfolion faster than they pay off in the portfolio they'll maintain or increase their earnings. What most don't understand about the lenders is that a falling interest rate environment isn't a piece of cake for them due to MBS prepays which decimated their portfolios of retained MBS paper.

The drop on Monday wasn't related to NFI earning but do to an inaccurate story in the WSJ. The company set the record straight in a conferance call on Monday. At $40 a share I'm a buyer.

[squiffy]

First, you misconstrued my quote. I said I had bought CFC puts and was glad I made a little money. The poster said you should have bought Novastar puts. I agreed. Had I bought them I would have made money. And I implied that Novastar was not a good long term buy, prior to its unexpected drop. I did not state that it dropped because it had bad fundamentals. Though I would have bought the puts pre-drop, had I thought about Novastar, because I thought it had bad long term prospects.

Second, if Novastar makes much of its profit from initiating packaging and selling mortgages, then its profits should decline if mortgage volume declines. After 3-4 years of tremendous growth, I think long term prospects are for mortgage "sales" to decline.

Packaging the mortgages and selling the stream of payments to others certainly would alleviate the problem of loaning money out ata fixed rate of 6% over 30 years and having inflation rise to 10% at some point.

But you said they sell some of their mortgages, not all. If they retain some of their mortgages and collect the stream of payments, increasing inflation will tend to hurt them. Period.

If they make huge profits initiating mortgages and mortgage volume declines, how do they make money? I don't follow your analysis.

Third, even if you have more information about a particular company, that does not guarantee that your prediction about the company's future stock price will be more accurate in either the long or short term, as there are other micro and macro economic factors to consider.

Fourth, on 12/16/03 you seemed to be recommending that people buy CFC. Split adjusted CFC closed at about 57.29 when you made the prediction. It went up short-term to 64 on 3/5 and again on 4/1. But has since declined to 55.77 or so, split adjusted.

So you what time frame were you considering when you made that prediction? At the time, it seemed to me that you though CFC was a long-term hold. I still disagree that it was a long-term hold. And I disagree that Novastar is a long-term hold in a rising rate environment with a reportedly high percentage of sub-prime loans in their portfolios.

I agree that Novastar may be a short-term buy. But over what time period? You would buy Novastar today and hold for how long?

I think it helps for both of us to be more specific about holding periods. You seem to be focused more on short-term trends, and I on long term trends.

[squiffy]

NFI is now down another 8.8% to 38. So if you were a buyer at 40, you may be out some money short term. You predict that NFI will be how much higher over the next week? month? 3 months? etc.

[AceHigh]

NFI has an earnings announcement at the end of the month, April 28th, I think. I would be shocked if it's not above 40 by 5/1, my guess is it will be closer to 60 than 40 by 5/15.