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This topic was brought up September of last year, one of the first posts of this blog - The Performance of Centex's Mortgage Origination. The mortgage origination units of the builders are not getting enough attention, and they are significant drags on performance (as if this group needs any more of that) as well as dangerous liabilities on the balance, and often off balance sheet as well. There may be some very turbulent and adverse price action as the shares of Centex have surged with  the "bear market sucker;s rally" and are at levels that can in no way be justified by valuations.

The latest quarters results were pretty bad, but the media didn't catch all that there is to tell... From Bloomberg.com:

Centex Loss Widens as Slump, Lending Woes Cut Demand (Update1)

By Brian Louis

Jan. 29 (Bloomberg) -- Centex Corp., the second-largest U.S. homebuilder, reported a $975.2 million third quarter loss as the housing slump and tighter lending standards cut demand. The net loss amounted to $7.94 a share in the three months ended Dec. 31, seven times more than analysts' projections. Revenue fell 30 percent to $1.9 billion, the Dallas-based company said today in a statement. In the year earlier period, Centex had a loss of $228 million, or $1.90. Centex wrote down $554 million in land and property values in the quarter and has cut more than 40 percent of its workforce since 2006. New home sales in the U.S. fell to a 12-year low in December, capping the biggest annual decline since records began in 1963, the Commerce Department said yesterday.

``There's too much existing home inventory on the market to prevent any sort of significant increase in the pace of housing starts,'' said James McCanless, an analyst at FTN Midwest Securities Corp. He rates the shares ``buy.'' Whaaaatttt???

Centex was projected to report a net loss of $1.13 a share, according to the average estimate of nine analysts in a Bloomberg survey. Orders fell 10 percent in the quarter to 5,537. The company closed on 6,657 houses, a 20 percent decline from a year earlier. The average price fell 11 percent to $268,588. Centex also recorded a write down on the value of future tax benefits totaling $500 million.

``The housing market continues to correct and tighter mortgage underwriting standards are affecting home prices,'' Tim Eller, Centex's chief executive officer, said in the statement.

The company's backlog, or homes under contract and not yet sold, fell 36 percent to 8,513 homes. The value of the backlog tumbled 47 percent to $2.3 billion. This means that the company lost over $2 billion (nearly 50%) in projected revenue. In case anybody is having a problem parsing this, let me help you - This is very bad news...

Centex rose 36 cents to $29 in New York Stock Exchange composite trading today. Of course it did. These shares are being set up for a nasty fall. The shares have dropped 43 percent over the past 12 months, compared with a 46 percent decline in a Standard & Poor's measure of 15 homebuilders.Centex, founded in 1950, sold the most homes in its fiscal third quarter in Texas.

And from Reggie...

What is not captured is the half billion dollars or subprime home equity loans sitting on(and off) Centex's balance sheets. They just happen to be concentrated in the most toxic vintages possible (2005H2, 2006, 2007H1). This is the most dangerous cocktail possible:

  1. subprime
  2. home equity
  3. toxic vintages
  4. loans orginated from a builder who is trying to move inventory
  5. loans originated off of a warehouse credit line that have no place to go due to a very tight market and next to zero demand
  6. worsening macro conditions for housing, foreclosures, and declining prices.

 

Stephen King couldn't script a scarier scenario. These loans performed awful last year (see the link to the earlier post above), as is to be expected considering how easily Centex probably gave them away in an effort to move homes. Well, this year it is abysmal. I am expecting nearly a quarter billion dollars of actual losses on these assets, and Centex cannot move these at all - there is zero market for them.

Why recommend a sector that, even in normal times, would hand in average utility-like performance with greater than utility risk when this is probably the most difficult period ever in the history of public homebuilders? This will be a very bad year for this industry, and if you bottom fish you are taking undue risk that you will not be compensated for in terms of potential for reward.

See the itemization of Centex's subprime assets, security by security in the following chart... 

Asset Name  Par Amount  Asset Class Vintage/Min. Rating   Loss  Anticipated Loss Ratio:
CHEC LOAN TRUST 2004-1 - CHEC 2004-1 M7  $         486,908 Subprime Home Eq. 2004H2 BBB  $       223,977 46%
CHEC LOAN TRUST 2004-1 - CHEC 2004-1 M8  $         438,200 Subprime Home Eq. 2004H2 BBB  $       201,572 46%
CHEC LOAN TRUST 2004-1 - CHEC 2004-1 M9  $         455,450 Subprime Home Eq. 2004H2 BBB  $       209,507 46%
CHEC 2004-2 M6 - LIBOR 1MO + 3%  20340125  $      1,250,000 Subprime Home Eq. 2004H2 BBB  $       575,000 46%
CHEC 2004-1 A3 - LIBOR + 0.5% 07/25/2034  $      2,204,615 Subprime Home Eq. 2004H2 AAA  $       507,061 23%
Centex Home Equity Co LLC 2004-2 (CHEC 2004-2  M6)  $      4,000,000 Subprime Home Eq. 2004H2 BBB  $    1,840,000 46%
CHEC 2004-2 - M5 Libor+1.70% 02/2034  $      1,836,000 Subprime Home Eq. 2004H2 BBB  $       844,560 46%
CXHE 2006-A - M11 Libor+2.50% 06/2036  $         950,000 Subprime Home Eq. 2006H1 BB  $       491,625 52%
CENTEX HOME EQUITY LOAN TRUST 2006-A M9 - Libor + 1.92%  06/25/2036  $      3,000,000 Subprime Home Eq. 2006H1 BBB  $    1,380,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M7)  $      2,000,000 Subprime Home Eq. 2006H1 BBB  $       920,000 46%
CENTEX HOME EQUITY LOAN TRUST 2006-A M-11 - Libor + 2.5%  06/25/2036  $      2,500,000 Subprime Home Eq. 2006H1 BB  $    1,293,750 52%
CXHE 2006-A M1 - LIBOR + 0.3% 06/25/2036  $      3,750,000 Subprime Home Eq. 2006H1 AA  $    1,293,750 35%
CXHE 2006-A M2 - LIBOR + 0.32% 06/25/2036  $      9,250,000 Subprime Home Eq. 2006H1 AA  $    3,191,250 35%
CXHE 2006-A M3 - LIBOR + 0.33% 06/25/2036  $      8,500,000 Subprime Home Eq. 2006H1 AA  $    2,932,500 35%
CXHE 2006-A M5 - LIBOR + 0.38% 06/25/2036  $      3,500,000 Subprime Home Eq. 2006H1 A  $    1,408,750 40%
Centex Home Equity 2003-A (CXHE 2003-A M3)  $         965,267 Subprime Home Eq. 2003H1 BBB  $       289,580 30%
CXHE 2006-A - M8 Libor+1.10% 06/2036  $      4,000,000 Subprime Home Eq. 2006H1 BBB  $    1,840,000 46%
CXHE 2006-A M4 - LIBOR + 0.37% 06/25/2036  $      5,000,000 Subprime Home Eq. 2006H1 A  $    2,012,500 40%
CXHE 2006-A M6 - LIBOR + 0.49% 06/25/2036  $      4,000,000 Subprime Home Eq. 2006H1 A  $    1,610,000 40%
Centex Home Equity 2006-A (CXHE 2006-A M4)  $      5,000,000 Subprime Home Eq. 2006H1 A  $    2,012,500 40%
CENTEX HOME EQUITY LOAN TRUST 2006-A M-8 - Libor + 1.1%  06/25/2036  $      1,500,000 Subprime Home Eq. 2006H1 BBB  $       690,000 46%
CXHE 2006-A - M11 Libor+2.50% 06/2036  $      3,500,000 Subprime Home Eq. 2006H1 BB  $    1,811,250 52%
CXHE 2006-A M1 - LIBOR + 0.3% 06/25/2036  $      3,000,000 Subprime Home Eq. 2006H1 AA  $    1,035,000 35%
Centex Home Equity 2006-A (CXHE 2006-A M2)  $    12,000,000 Subprime Home Eq. 2006H1 AA  $    4,140,000 35%
Centex Home Equity 2002-A (CXHE 2002-A BV)  $         317,882 Subprime Home Eq. 2002H1 BBB  $         76,292 24%
Centex Home Equity 2002-D (CXHE 2002-D B)  $      1,324,492 Subprime Home Eq. 2002H2 BBB  $       344,368 26%
CENTEX HOME EQUITY LOAN TRUST 2006-A - CXHE 2006-A M8  $      3,500,000 Subprime Home Eq. 2006H1 BBB  $    1,610,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)-x1  $      3,000,000 Subprime Home Eq. 2006H1 BBB  $    1,380,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)-x2  $      3,000,000 Subprime Home Eq. 2006H1 BBB  $    1,380,000 46%
CHEC 2004-1 - M8 Libor+2.13% 07/2034 LENOX  $      2,500,000 Subprime Home Eq. 2004H2 BBB  $    1,150,000 46%
CHEC LOAN TRUST 2004-1  $    11,249,707 Subprime Home Eq. 2004H2 AAA  $    2,587,433 23%
CXHE 2006-A - M1 Libor+0.30% 06/2036  $      1,200,000 Subprime Home Eq. 2006H1 AA  $       414,000 35%
Centex Home Equity 2002-A (CXHE 2002-A BV)  $         875,306 Subprime Home Eq. 2002H1 BBB  $       210,073 24%
Centex Home Equity 2002-C (CXHE 2002-C B1)  $         744,648 Subprime Home Eq. 2002H2 BBB  $       193,608 26%
Centex Home Equity 2002-D (CXHE 2002-D B)  $         993,369 Subprime Home Eq. 2002H2 BBB  $       258,276 26%
CXHE 2002-D - M2 Libor+2.05% 12/2032  $         960,666 Subprime Home Eq. 2002H2 A  $       218,552 23%
Centex Home Equity 2006-A (CXHE 2006-A M5)  $      6,000,000 Subprime Home Eq. 2006H1 A  $    2,415,000 40%
Centex Home Equity 2006-A (CXHE 2006-A M1)  $    10,000,000 Subprime Home Eq. 2006H1 AA  $    3,450,000 35%
Centex Home Equity Co LLC 2004-2 (CHEC 2004-2 M4)  $      2,000,000 Subprime Home Eq. 2004H2 BBB  $       920,000 46%
Centex Home Equity Co LLC 2004-2 (CHEC 2004-2 M5)  $      1,250,000 Subprime Home Eq. 2004H2 BBB  $       575,000 46%
Centex Home Equity Co LLC 2004-2 (CHEC 2004-2 M6)  $      4,000,000 Subprime Home Eq. 2004H2 BBB  $    1,840,000 46%
CXHE 2006-A M5 - LIBOR + 0.38% 06/25/2036  $      3,000,000 Subprime Home Eq. 2006H1 A  $    1,207,500 40%
CXHE 2006-A M7 - LIBOR + 0.88% 06/25/2036  $      2,000,000 Subprime Home Eq. 2006H1 BBB  $       920,000 46%
CXHE 2006-A M9 - LIBOR + 1.92% 06/25/2036  $      2,500,000 Subprime Home Eq. 2006H1 BBB  $    1,150,000 46%
Centex Home Equity Co LLC 2004-2 - 1.27000%  $    10,000,000 Subprime Home Eq. 2004H2 BBB  $    4,600,000 46%
CHEC06A,M7  $    14,204,545 Subprime Home Eq. 2006H1 BBB  $    6,534,091 46%
CHEC06A,M7  $    13,888,889 Subprime Home Eq. 2006H1 BBB  $    6,388,889 46%
CXHE 2006-A M9 CDS - LIBOR + 2.5% 06/25/2036-x1  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
CXHE 2006-A M9 CDS - LIBOR + 2.5% 06/25/2036-x2  $      3,300,000 Subprime Home Eq. 2006H1 BBB  $    1,518,000 46%
CENTEX CORPORATION  $         750,000 Subprime Home Eq. 2005H1 BB  $       388,125 52%
CXHE 2006-A M8  $      6,250,000 Subprime Home Eq. 2006H1 BBB  $    2,875,000 46%
Centex Home Equity Loan Asset backed Certs, Series 2006-A M3  $    10,000,000 Subprime Home Eq. 2006H1 AA  $    3,450,000 35%
CXHE 2006-A - M9 Libor+2.03% 06/2036 TBS 06-5  $      1,000,000 Subprime Home Eq. 2006H1 BBB  $       460,000 46%
CXHE 2006-A M7 - LIBOR + 0.88% 06/25/2036  $      3,500,000 Subprime Home Eq. 2006H1 BBB  $    1,610,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M7)  $      3,500,000 Subprime Home Eq. 2006H1 BBB  $    1,610,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M5 - Synth)  $      7,500,000 Subprime Home Eq. 2006H1 A  $    3,018,750 40%
CENTEX HOME EQUITY LOAN TRUST 2006-A M9 - Libor + 2.36%  06/25/2036  $      1,800,000 Subprime Home Eq. 2006H1 BBB  $       828,000 46%
CXHE 2006-A - M8 Libor+0.98% 06/2036 TBS 06-5  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
CXHE 2006-A - M9 Libor+2.03% 06/2036 TBS 06-5  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
CXHE 2006-A - M8 Libor+1.10% 06/2036  $      3,500,000 Subprime Home Eq. 2006H1 BBB  $    1,610,000 46%
CXHE 2006-A - M8 Libor+1.98% 06/2036 TBS 06-6  $    16,000,000 Subprime Home Eq. 2006H1 BBB  $    7,360,000 46%
CXHE 2006-A M9 CDS - LIBOR + 2.38% 06/25/2036  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
CXHE 2006-A M9 CDS1 - LIBOR + 2.58% 06/25/2036  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
CXHE 2006-A - M9 Libor+2.42 06/2036 TOP 2  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
CHEC 2004-1 M9  (CDS LRDG 1.98) - LIBOR + 1.98% 07/25/2034  $      2,559,910 Subprime Home Eq. 2004H2 BBB  $    1,177,558 46%
CXHE 2006-A - M8 Libor+1.61% - 06/2036 DRC 15231AAM8DR  $    17,000,000 Subprime Home Eq. 2006H1 BBB  $    7,820,000 46%
CXHE 2006-A M9  $      8,500,000 Subprime Home Eq. 2006H1 BBB  $    3,910,000 46%
CXHE 2006-A M9  $    17,934,783 Subprime Home Eq. 2006H1 BBB  $    8,250,000 46%
CXHE 2006-A M9 CDS - LIBOR + 2.28% 06/25/2036  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
CXHE 2006-A M5  $    21,000,000 Subprime Home Eq. 2006H1 A  $    8,452,500 40%
CXHE 2006-A - M9 Libor+1.97% 06/2036 OCTO  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
CENTEX HOME EQUITY LOAN TRUST 2006-A M-8 - Libor + 1.21%  06/25/2036  $      6,000,000 Subprime Home Eq. 2006H1 BBB  $    2,760,000 46%
CENTEX HOME EQUITY LOAN TRUST 2006-A M-8 - Libor + 1.65%  06/25/2036  $      1,500,000 Subprime Home Eq. 2006H1 BBB  $       690,000 46%
CENTEX HOME EQUITY LOAN TRUST 2006-A M9 - Libor + 1.92%  06/25/2036  $      2,000,000 Subprime Home Eq. 2006H1 BBB  $       920,000 46%
CENTEX HOME EQUITY LOAN TRUST 2006-A M-8 - Libor + 1.33%  06/25/2036  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)  $    12,000,000 Subprime Home Eq. 2006H1 BBB  $    5,520,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M8 - Synth)-x1  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M8 - Synth)-x2  $      3,000,000 Subprime Home Eq. 2006H1 BBB  $    1,380,000 46%
CXHE 2006-A - M9 Libor+2.30% - 06/2036 LPF  $      7,500,000 Subprime Home Eq. 2006H1 BBB  $    3,450,000 46%
SYNTH - CXHE 2006-A M8 - LIBOR + 0.98% 06/25/2036  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
SYNTH - CXHE 2006-A M8 - LIBOR + 1.03% 06/25/2036  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
CXHE 2006-A M8 CDS - LIBOR + 2% 06/25/2036  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M8)  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9 - Synth)  $      6,000,000 Subprime Home Eq. 2006H1 BBB  $    2,760,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M11)  $      3,050,000 Subprime Home Eq. 2006H1 BB  $    1,578,375 52%
Centex Home Equity 2006-A (CXHE 2006-A M9)  $      5,000,000 Subprime Home Eq. 2006H1 BBB  $    2,300,000 46%
CENTEX HOME EQUITY LOAN TRUST 2006-A - CXHE 2006-A M9  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
Centex Home Equity 2006-A (CXHE 2006-A M9)  $    10,000,000 Subprime Home Eq. 2006H1 BBB  $    4,600,000 46%
   $   511,740,636      $ 221,873,523