Tuesday, February 27, 2007

Paperstand (BKUNA, CFC, NEW, NFI, IHP)

The WSJ’s „Heard on the Street” column out saying that the worst may be yet to come for mortgage lenders. If subprime borrowers continue to have problems paying their debts, the lenders that tgt them likely will have to boost their reseves, cutting into their bottom lines. That could mean even lower stock prices. There also is a concern that if the real-estate mkt remains cool, some borrowers with better credit histories might also begin struggling to make payments on certain popular, but unorthodox, mortgages. If that happens, co’s such as BankUnited (BKUNA) and Countrywide (CFC) could suffer. When a co keeps its reserve low, it makes its earnings look better b/c it continues to increase its assets from loans it originates and sells off. Lenders need to set aside reserves to cover any possible losses when borrowers fail to make payments. Subprime-mortgage lenders generally sell most of their loans to investors, but many keep some loans as investments. These portfolios have grown as the number of new mortgages has risen. New Century (NEW) and Novastar (NFI) hold billions of dollars of loans for investment. While they have been increasing their loan-loss provisions, delinquencies have been coming faster than anticipated. NovaStar's reserves were 1.05% of its $2.1bn in loans held for investment in the 4Q, but still ranked among the lowest in the industry, according to Zach Gast, of CFRA. Subprime-mortgage lenders are likely to start reporting significant shortfalls in their loss reserves "as soon as the next several quarters," predicts David Honold, of Turner Investment Partners.

Barron’s Online “Inside Scoop” section reports that Third Point took a big bite into the richly priced shares of IHOP (IHP) with the hope that the co's International House of Pancakes restaurant brand will continue to stack up gains. So far this month, Third Point has spent $21.7M to purchase 400K shares on the open mkt. The Park Avenue hedge fund now owns 1.25M shares, or 7% of IHOP's 17.8M outstanding shares and has spent nearly $61.6M to accumulate this stake. InsiderScore.com's Ben Silverman says that Third Point, when piqued by a co's performance, can become "unfriendly" in pushing mgmt to unlock shareholder value. So at IHOP, "if they choose to switch on that flip, it certainly would be interesting," he adds. In the meantime, Third Point's "buying into strength is a good sign that they believe the fundamentals in the co are solid," says Silverman.

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