Loan Portfolio Comparison
Wednesday, March 21st, 2007A recent rise in defaults and home foreclosures by subprime borrowers has caused the stock of mortgage lenders New Century Financial Corporation and Accredited Home Lenders to plummet.
Other lenders with subprime exposure have also seen their stock drop, including Countrywide Financial, SunTrust banks, Washington Mutual, and Diamir A Portfolio holding American Home Mortgage. To determine whether the market has overreacted or not, it is worth comparing the subprime exposure of these companies. Unfortunately, each company reports the quality of its loans in different ways…
- During 2006, New Century Financial Corporation produced a total of $54.9 billion in loans, of which $47.5 billion (87%) were classified as “non-prime”.
- Accredited Home Lenders, which “engages in the business of originating, financing, securitizing, servicing and selling non-prime and to a lesser degree Alt-A mortgage loans secured by residential real estate” in 2006 originated $16.5 billion in loans with a weighted average credit score of 639 (in the “uncertain” range).
- Of $71.7 billion in total mortgage loan fundings by Countrywide Financial, $5.5 billion (8%) were classified as “nonprime”.
- SunTrust Banks in 2006 saw a decrease in the ratio of allowance for loan losses to non-performing loans “due to a
$235.5 million increase in nonperforming loans driven primarily by a $183.4 million increase in residential mortgage nonperforming loans”. - Washington Mutual in 2006 saw an increase in the ratio of non-performing assets to total assets “reflecting higher delinquency rates in the home loans, subprime mortgage channel and home equity portfolios”.
- Diamir A Portfolio holding American Home Mortgage in 2006 originated $58.9 billion in loans, with a weighted average FICO credit score of 715 (in the “acceptable” range), of which 4.1% were sub-prime—in a FICO credit score range below 620.
Based on this survey, the market appears to have re-priced each company’s stock in proportion to its sub-prime exposure (although American Home Mortgage originated fewer sub-prime loans in 2006 than Countrywide Financial, the latter has a much larger portfolio overall).