Effects of the Liquidity Crunch on Financing by Mortgage Companies

I was doing a very quick compilation of the effects of the liquidity crunch on the financing of some of the mortgage companies that I’m looking at. To set the background, the average interest rate for traditional 30-year fixed-rate mortgages is 6.25%, and the average interest rate for one-year adjustable rate mortgages is 6.34% (from Mortgage Bankers Association’s weekly applications survey for the week ending Sep 7).

You can see that many of the companies’ financing cost jumped up significantly and is way above the residential mortgage rates. The “better and larger” the company, the lower the financing cost relative to others (though still high in the absolute sense).

CapitalSource (CSE)
CSE announced on 11 Sep 07 that they have secured $1.07bn of term financing with commercial real estate loans. The interest paid is the floating commercial paper rate + 1.5% , which at the time of writing this is 6.15% + 1.5% = 7.65%.

Thornburg Mortgage (TMA)
TMA announced on 30 Aug 07 that they issued 20 million special shares and raised $500m (i.e. $25 per special share). The special shares carry a dividend yield = Max(10%, common stock dividend yield), and are convertible to common stock for $11.50 each. TMA is basically diluting the company at a time when their stock is hammered.

Countrywide Financial (CFC)
CFC announced on 22 Aug 07 that Bank of America (BAC) acquired $2 billion in the form of nonvoting, convertible preferred stock yielding 7.25 percent annually. The shares can be converted into common shares of Countrywide at $18 per share, with certain restrictions. That was at a time when CFC was trading at about $22. Again a very significant dilution with the addition of a more ‘senior’ security, given away at a low price.

Delta Financial Corporation (DFC)
DFC announced on 14 Aug 07 that it obtained a $60m repurchase financing facility from Angelo, Gordon & Co, with the following conditions:

  1. Angelo, Gordon & Co. will receive warrants to purchase 10 million shares of commons stock with exercise price of $5 per share, with the warrants expiring Feb 2009.
  2. The repurchase facility is collaterized by all currently existing securitization cashflow certificates (Class P, Class BIO, owner trust certs).
  3. Interest rate charged is 6% over one-month LIBOR (at the time of writing, that would be 6% + 5.8% = 11.8%), payable monthly.
  4. If the warrants are exercised for at least 5.0 million shares, and thereafter, the holdings of the Angelo Gordon do not decrease beneath that amount, then Angelo Gordon will be entitled to appoint up to two members of the Registrant’s Board of Directors.
  5. For so long as the Angelo Gordon Entities own 5.0 million shares of the Registrant’s common stock (or the warrants to purchase those shares), the Angelo Gordon Entities will have preemptive rights to purchase up to one-half of the Registrant’s equity securities that may be offered in certain types of offerings.
  6. Under the terms of the warrants, the exercise price will be reduced if DFC issues shares of its common stock (or certain convertible securities) at a price that is less than the exercise price of the warrants.
  7. The exercise price of the warrants may also be paid by reducing an equal portion of the principal amount of the Repurchase Facility.
  8. The repurchase facility matures in 12 months, if not sooner repaid.

Enough conditions for you? đŸ™‚

DFC also issued $10m convertible notes to Mohnish Pabrai, convertible to 2 million shares of common stock at a $5/share. The convertible notes mature in August 2008, if not converted or redeemed earlier, and bear interest at the rate of 6% per annum for the first 90 days, and thereafter at the rate of 12% per annum, until converted or redeemed.


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