Low interest rates have taken a toll on home equity lenders-most recently causing one to revise its earnings projection and another to take a half-billion-dollar charge.
Contifinancial Corp. said last week that it expects to report earnings for the quarter ended June 30 of 13 cents a share, about 45 cents below expectations, according to James E. Moore, president and chief executive officer, and 46 cents lower than a year earlier. The expected decline is due to a one-percentage-point adjustment upward in expected prepayment speed, to 28%.
And Conseco Inc., Carmel Ind., said Friday that it expects to take a $498 million special charge related to its recently closed acquisition of manufactured housing lender Green Tree Financial Corp., St. Paul.
The charge includes $148 million of merger related costs and a $350 million writedown of Green Tree's interest-only securities and servicing rights, which lost value because of faster than expected prepayments.
Including this charge, Green Tree will have written off about $850 million this year.
Contifinancial's revision of projected earnings surprised many analysts and investors because of the company's reputation as a conservative player that was unlikely to slip up.
"The company was considered the stellar home equity lender," said Katrina Blecher, Gruntal Securities analyst.
The adjustment assumes lower interest rates will prevail for the life of the securitizations, Contifinancial said.
"If interest rates remain this low for the next seven years, we won't need to take another charge," said Mr. Moore.
Because the company has been securitizing since 1993 and has more loan pools than many industry newcomers, Conti's one-percentage-point adjustment significantly affects its earnings.
Conti also decided to defer a commercial mortgage securitization until its second fiscal quarter, which ends Sept. 30, in order to get better execution, and to take an $8 million pretax charge for payouts on the interest-only tranches of its 1995-to-1997 securitizations.
This quarter's adjustment is not expected to affect yearend earnings but significantly affected Conti's stock price.
Since the announcement late Thursday, Conti has traded down as much as $6.25. Its shares, which closed Thursday at $25.25, traded as low as $19 Monday. Conti was trading at $20.75 at midday Tuesday.
Conseco's writedown, though deemed more controversial in light of the criticism of the $6.5 billion price the insurance company paid for Green Tree, had less impact on the stock price, which changed little on the news. The writedown had been expected by analysts.
Though the sector has been plagued by writedowns in the past six months, analysts are not necessarily recommending that investors jump ship.
"We've been here before," said E. Reilly Tierney, analyst at Fox, Pitt Kelton. "The companies still have economic value-some of them even look attractive now."
Conti's decision was inevitable, given the current interest rate environment, Mr. Tierney said.
Contifinancial is a "major force in the wholesale mortgage business," he said. "If prepayments are rising on a secular trend, there's no way Conti could be immune to it."