Subprime City Confidential: Aug. 15, 2007

Mortgage fears go Countrywide. Will Lone Star have to hold its nose and buy Accredited? Canada's housing market sizzlesand more

Countrywide's Conundrum

Countrywide (CFC), which has spared no effort to remind the Street that it has access to oodles of liquidity, can't seem to convince the doubters. The shares fell sharply in afternoon trading on Aug. 15, following wire-service reports of rumors that the company has been unable to borrow money in the commercial paper market. The speculation comes on the heels of a downgrade of the stock, to the rare sell call by a Merrill Lynch (MER) analyst. (Analysts usually stop covering a company when it starts going downhill, avoiding the need for a negative recommendation.)

Volume was extraordinarily heavy—almost six times the stock's average—persuading Standard & Poor's analyst Stuart Plesser that some major institutional holders are selling shares. Plesser also thinks that the company has probably been forced to hold more loans than it is accustomed to, due to lack of liquidity in the secondary market.

BusinessWeek's Ben Steverman writes that executives and many analysts believe Countrywide has enough to cash to keep more loans on its balance sheet until the secondary market returns to normal (see, 8/15/07, "Mortgage Lenders: Close to the Edge?"). When that will happen is anyone's guess.

Thornburg: The Check Is (Not Quite) in the Mail

Mortgage lender Thornburg (TMA) would probably get miffed—or worse—if its customers said they were delaying their regularly scheduled payments. But when Thornburg President Larry Goldstone said the company would delay payment of its regular quarterly dividend from a scheduled date of Aug. 15 until Sept. 17, investors bid the shares higher anyway.

The real reason for Wednesday's share-price jump was investor relief with the company's assertions that it has received and met all margin calls to date. The day before, Thornburg's stock had tumbled 47%. Thornburg said the dividend delay comes in response to significant disruptions in the mortgage market that have caused a "sudden and unprecedented" decline in the market prices of the company's AAA-rated mortgage securities. As the mortgage security prices plummeted, the decline in the value of the company's holdings forced Goldstone to hold off on the payout. Thornburg's book value per share has declined to $14.28, from $19.38 at June 30.

Accredited: Buy Me or Else

Shares of another beleaguered mortgage lender (is there any other kind these days?), Accredited Home (LEND) jumped Aug. 15 after Lone Star Funds said late Aug. 14 that it will extend its $15.10 per share, or $400 million, tender offer for Accredited until Aug. 28 due to a request by the company.

One day earlier, Accredited sued Lone Star and two affiliates in an attempt to get them to follow through with their offer. Lone Star, like the fellow who discovers a big puddle of oil under the used car he's about to write a check for, has tried to back out of the deal. According to a Dow Jones (DJ) report, Lone Star said in a filing Aug. 10 with the Securities & Exchange Commission that Accredited Home wouldn't meet the conditions of its offer, initially launched in June.

Builders' Blues

Hey Bob the Builder, why the long face? The kid-show construction whiz and his industry brethren are feeling mighty low these days. Witness the latest report from the U.S. National Association of Home Builders. The industry group's sentiment index fell to 22 in August after tumbling to 24 in July, and is down from the high for 2007, 39 in February, reports Action Economics. The August reading is the lowest since January, 1991 (during the first Gulf War).

Action's analysts say the drop in sentiment is not surprising in this environment, "especially as it doesn't look like the housing market is out of the woods yet." But the research firm notes that "there's not a strong correlation between builder sentiment and actual construction" six months to a year out.

Whoa, Canada

The Great White North's credit markets may be just as shaky as ours, but its housing market is pistol-hot. Action Economics reports that Canadian existing-home sales hit another record level in July, as sales in the country's major markets rose 0.8% from June, according to the Canadian Real Estate Assn. The resale market tightened as sales activity picked up and new listings dropped 1.4% from the record total in June. Prices continued to move higher, with the average price surging 13.1% year over year to a lofty C$332,400. Read it and weep.

Reasons to Be Chair-ful

The housing gloom and its evil twin, the subprime mess, have been blamed for poor sales at many retailers, with giants Wal-Mart (WMT) and Home Depot (HD) being the latest to do exactly that. But furniture merchant Ethan Allen (ETH) managed to surprise the Street Aug. 15 by reporting that same-store sales rose modestly in June, with the trend continuing into July. The company isn't doing any victory dances just yet, noting that it "remains cautiously aware consumer confidence can be impacted by several factors beyond its control."

Morgan Keegan analyst Laura Champine upgraded the shares from underperform to market perform, noting the stock's pullback year-to-date. Champine noted Ethan Allen is continuing "aggressive" share buybacks, with 1.1 million shares repurchased quarter to date, which could add about 10¢ to her fiscal 2008 (ending June) earnings-per-share estimate of $2.57.

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