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Novastar Financial, Inc (NFI)

SJ's take on Pr...

SJ's take on Production Report 4/12/06

mhatmccane

409 posts

Joined
1/20/2006

SJ's take on Production Report 4/12/06
Posted: 13 Apr 06 8:44 AM

NOTES ON MARCH 2006 PRODUCTION REPORT
by: smoothjazz0204

04/12/06 05:41 pm
Msg: 422557 of 422745

Once again, NFI defies the naysayers and comes in with another solid month, in spite of the many forces arrayed against it. For weeks we've been hearing from flamers that production was in free fall and look what happens: THE COMPANY INCREASED NON CONFORMING WHOLESALE VOLUME 19% FROM FEB ON A PER DAY BASIS.

Here are my bullet points:

1. Non conforming Wholesale production ($741M) was up almost 6% Y-o-Y (from $708M in March 2005) and 40%, yes 40%, M-o-M from the $522M reported in Feb. Of course, Mar had more days, but still very impressive production numbers. As I mentioned earlier, it was up 19% on a per day basis. THE BASHERS CANNOT SPIN THAT ANY OTHER WAY. EXCEPTIONAL PERFORMANCE IS THE ONLY WAY TO DESCRIBE THAT

2. As noted by a number of other posters, WAC stayed flat versus Feb at 8.7%. That is to be expected since the 10 Yr, and all the prime & subprime coupons pegged to it, did not spike up until late March/early April. We should start to see WAC get closer to 9% in the next report

3. LTV stayed in the 81% range, a decent number from a subprimer. Of course, that does not reflect mortgage insurance and is based on loan value at mortgage inception

4. Retail volumes ($129M) were down approx 50% from last year as expected reflecting the announced retrenchment, but up from the $120M last month. Even though March had more days, I was surprised this number went up M-o-M. I would have thought the continuing cutbacks to drive down cost to originate would have lowered this number in March in spite of the lower days

In summary, I have to admit I was pleasantly surprised by the volume numbers, even for the retail business which is in retrenchment mode. Given that Mgmt has telegraphed that they expected production to drop as rates ticked up, they may have been surprised by these numbers themselves or sandbagging with their prior hints of production falling.

Great job once again guys. And with another $1B in purchased loans on the BS, it looks like they are protecting the income stream rather nicely. IMHO.

BOL to All.

mhatmccane

409 posts

Joined
1/20/2006

Re: SJ's take on Production Report 4/12/06
Posted: 13 Apr 06 8:07 PM

March Production Lowdown
by: nopullnoshow (55/M/West Texas)
Long-Term Sentiment: Strong Buy

04/12/06 04:57 pm
Msg: 422531 of 422982

Management has pointed out that in this financial environment, quality rather than quantity would be emphasized. With the first quarter's production now complete and the WAC having increased, they are true to their word. Once again.

And this month, we also got geat production! Right on, boys!

Phil

Ok... here we go with March '06 numbers:

Prod: $741,297,000 (Mar. '05 708,500,000)

#Days: 23

Ave. Daily: $32,230,000

WAC: 8.57%

WAC (Exc. MTA): 8.78% (Jan. 8.62% Feb.8.78%)

LTV: 81.7%

FICO: 627

(Note: Production does not include approx. $987 million in bulk purchased MTA loans during the period.)

mhatmccane

409 posts

Joined
1/20/2006

Re: SJ's take on Production Report 4/12/06
Posted: 13 Apr 06 8:23 PM

Re: NOTES MAR 06' PROD REPORT/??
by: love_learn

04/13/06 04:38 pm
Msg: 422863 of 422985

Smoothjazz said, "Mgmt has stated for some time that mortgage banking has NOT been profitable in part because the overhead and other fixed costs associated with running certain offices have become problematic in an era when cost of funds (2 yr sway & short term Libor) has shot up significantly. It is true that NFI once envisioned their retail franchise being a crown jewel, but they have signaled a willingness to cut back on a case by case basis when it makes sense and leverage that strategy with selective acquisitions of mortgage assets."

That is certainly true. Subprime lenders have experienced very different success rates in creating really successful retail channels. At yesterday's Delta Financial business conference appearance, one question raised during the closing Q&A period was roughly "What is the ideal mix between retail and wholesale channel originations?" Delta's representative paused only briefly to consider that question which I've never heard raised before and then said, "100% retail." Their reason is that Delta has been extraordinarily successful in growing a great performing retail channel. Delta's retail channel provides them lower origination cost loans while simultaneously providing a way to better manage the loan characteristics they are acquiring to grow their loan portfolio. They have recently applied multi-variate regression analysis to their 15 years of securitization records to decide how best to tweak their selection process. That in turn has lowered their default rate to sector-leading lows while slowing prepayment rates. When asked why they don't just go 100% retail channel the answer was that growing a really great retail channel is a slow difficult expensive process and that to meet their growth goals they were forced to also use wholesale sources even though their evaluation of wholesale loan qualities are less desirable while cost is higher.

In my opinion, it is never appropriate to say about subprime lending that "retail is more expensive than wholesale" or that "wholesale is more expensive than retail. It always depends on company specifics. Part of that is certainly dictated by management skill. But frankly, a lot of it also depends on regional geographic competition, population density in retail regions, and probably some luck, though no lucky management team would ever admit that.

I've found no subprime lender which executes the best among all sector competitors in all aspects of their business. It makes perfect sense to me that more competitors have been adopting accounting and risk management procedures inspired by NovaStar's comparative performance because in that part of their business, they appear to be the sector's leader.
John

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Specific Stocks

Novastar Financial, Inc (NFI)

SJ's take on Pr...