More Centex funding issues coming down the pike

In my very first post on this blog, I shared my "Thoughts on the Homebuilders" about 5 months ago. In particular, I was skeptical about their abilitiy to maintain swap agreements to fund their mortgage facilities, and the lingering (and value damaging) liabilites that the builders will be stuck with. Now that builders are forced to rely on warehouse credit lines for funding mortgages, they are very vulnerable to the whims of banks, who themselves are hurting for capital and not very willing to take risk. The next step in the saga is the pulling of credit lines and the sticking of bad morgtages back to the builders, which will choke them. The following is from Centex's latest 10Q:

Funding of Mortgage Loans

CTX Mortgage Company, LLC has historically funded its origination of mortgage loans through the sale of such mortgage loans to Harwood Street Funding I, LLC (“HSF-I”) and, to a lesser extent, through borrowings under more traditional committed bank warehouse credit facilities and mortgage loan sale agreements. As a result of the significant disruptions in the mortgageasset-backed commercial paper markets and , beginning in the second quarter of fiscal year 2008, HSF-I was unable to finance the purchase of mortgage loans from CTX Mortgage Company, LLC. In November 2007, HSF-I and the related swap arrangements were terminated and all outstanding obligations were redeemed. The termination of HSF-I was entirely due to these external market factors and not to any quality or performance issues related to HSF-I or its underlying collateral.

CTX Mortgage Company, LLC is currently funding its mortgage originations primarily through borrowings under a committed bank warehouse credit facility and a mortgage loan sale agreement. The warehouse facility generally allows CTX Mortgage Company, LLC to sell to the bank, on a revolving basis, mortgage loans up to an aggregate specified amount. Simultaneously, the bank has entered into an agreement to transfer such mortgage loans back to CTX Mortgage Company, LLC on a specified date or on the Company’s demand for subsequent sale by CTX Mortgage Company, LLC to third parties. Mortgage loans eligible for sale by CTX Mortgage Company, LLC under the warehouse facility are conforming loans, FHA/VA eligible loans, and jumbo loans meeting conforming underwriting guidelines except as to the size of the loan. The bank has the option to convert the facility to an amortizing loan based on the ultimate sale of the underlying collateral and not to purchase any additional mortgage loans under the warehouse facility if the Company’s long-term unsecured debt ratings fall below BB+ by Standard & Poors (“S&P”) or Fitch or below Ba1 by Moody’s Investors Service (“Moody’s”). The Company’s long-term unsecured debt is currently rated BBB- by S&P, BBB by Fitch and Ba1 by Moody’s. CTX Mortgage Company, LLC may also seek to enter into additional mortgage warehouse facilities with other lenders. Borrowings under the warehouse facility constitute short-term debt of Financial Services.

CTX Mortgage Company, LLC bears the credit risk associated with loans originated until such loans are sold to third parties. In connection with the loans it originates and sells to third parties, CTX Mortgage Company, LLC makes representations and warranties to the effect that each mortgage loan sold satisfies the criteria of the sale agreement. CTX Mortgage Company, LLC may be required to repurchase mortgage loans sold to third parties if such mortgage loans are determined to breach the representations and warranties of CTX Mortgage Company, LLC, as seller. CTX Mortgage Company, LLC records a liability for its estimated losses for these obligations and such amount is included in its loan origination reserve.

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written by fredw, February 07, 2008

It would appear homebuilders are in the tax loss business these days. Sell land or homes at a major loss and take the loss and apply against prior earnings.... For their sake , they better hope the Senate stimulus plan passes.... the homebuilders will be able to go back 5 years under that plan.

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written by Reggie Middleton, February 07, 2008

The risk with that is that it can be disallowed, since there weren't any "no action" letters granted. The Senate may not pass it since the dems and repubs are bickering (the latest stimulus package was struck down) - and the most significant risk to this strategy, you have to sell at a loss. That marks your entire inventory to market, and reveals the insolvency of most homebuilders, which would cause the prudent lenders to start enforcing covenants and pulling financing.

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written by Justin B, February 07, 2008

Question for fredw...how exactly would the proposed stimulus plan allow builders to go back 5 years? From what I've seen the stimulus plan does nothing but give consumers one more temporary bang. How will it prevent continued defaults, a continued drop in home values, and a continued increase in the supply glut of houses available? No amount of stimulus can reverse the fact that no one is buying homes or will be soon, meaning homebuilders will continue to have lower and lower earnings. What am I missing?

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written by Reggie Middleton, February 07, 2008

See http://online.wsj.com/article/...46249.html

Lennar Corp. has found a way to salvage something from the huge losses it incurred by overpaying for land during the housing boom.

Late last year, the Miami-based home builder sold a big swath of land -- about 11,000 home sites -- for $525 million to a partnership that it formed with Morgan Stanley. At first glance, the deal seemed terrible for Lennar, which had the land valued on its books at about $1.3 billion.


But the deal's structure allowed Lennar to recognize a big loss that it applied against taxes paid the previous two years. The result: Lennar is expecting a tax refund of more than $800 million, according to the company's annual results filed in late January.

As an added bonus, because of the way Lennar and Morgan Stanley structured their partnership, Lennar still effectively owns 20% of the land, according to the company. It also has a 50% voting interest in the partnership, meaning it will have a say in how the land is developed.

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Builders need cash
written by MSM, February 07, 2008

Builder's must be in a real cash crunch right now. I think book loss is irrelevant to them at this point in time. It appears they are willing to sell land and home inventory at monumental discounts so they can get cash in the door to pay the bills. Survival mode.

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written by Reggie Middleton, February 08, 2008

According to ML implode, CTX has sold their mortgage company as of last night http://ml-implode.com/ailing/l...02-06.html

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