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What To Do When The Roof Is Falling In: Weathering The
Credit Crunch
By Glenn Wilkins
September 5, 2007 (AllPennyStocks.com Media Inc.) - The
measure of an economy is how fast money changes hands,
primarily for items people need and use on a daily basis.
Investors pay close attention to car sales, food sales, and
most notably, home sales. When interest rates make money less
available for buying those homes, and folks paying down
mortgage risk defaulting on those loans, trouble follows, for
the families and for the nation. Such were the economic
tidings that greeted Americans this summer. While not on the
order of natural disasters such as Hurricanes Katrina or Dean,
the crisis caught the eye and ear of the man in the Oval
Office.
With concerns over mortgage defaults threatening consumer
spending, President Bush announced in late August the
government would help people with delinquent mortgages keep
their homes. Moreover, Fed Chair Ben Bernanke promised to “act
as needed” to limit the impact of loan defaults. The market –
small and large cap alike – took great stimulus from the twin
announcements, ending August on an upward note. The Standard &
Poor’s 500 index vaulted more than one per cent on the final
trading day before the long Labour Day weekend, reversing some
of the losses caused by the credit crunch crisis in the first
place!
As positive-thinking gurus on all sides will
remind us, the Chinese word for “crisis” is much the same as
the one for “opportunity”, the inference being that once one
has weathered the crisis, one can take advantage of a bevy of
opportunities. For investors trolling small-cap investments in
search of bargains, the opportunities are certainly there.
One company of three to consider (in no particular order) is
Woodbury, New York-based Delta Financial Corporation,
(Nasdaq: DFC). Delta is a specialty consumer finance
company, whose loans are primarily fixed rate and secured by
first mortgages on one- to four-family residential properties.
The company lends to individuals who do not satisfy the
credit, documentation or other underwriting standards set by
more traditional sources of mortgage credit, such as those who
follow the guidelines set by the Federal National Mortgage
Association (FNM, Fannie Mae to the man or woman in the
street) and the Federal Home Loan Mortgage Corporation (FRE,
better known as Freddie Mac).
News affecting Delta has not been uniformly good this summer.
Word came down in late August that as many as 300 employees
were being laid off; the week after that, investors found out
that they could not expect a third-quarter dividend.
Happenings such as this could work to the advantage of bargain
sleuths, however, for DFC’s price, after a 52-week summit of
$13.60, taxied to a very affordable range around $5.34 to
begin September. However, to paraphrase another aphorism, the
bitterness of poor return lingers long after the sweetness of
low price has faded, so look before you leap into Delta.
Even more affordable is IMPAC Mortgage Holdings
(NYSE: IMH), which calls Irvine, California home. IMPAC,
says company literature, is an “acquirer, originator, seller
and investor of non-conforming” alternative residential and
commercial mortgages. IMH operates four core business –
long-term investment, mortgage, commercial and warehouse
lending operations. The long-term division primarily invests
in adjustable rate and, to a lesser extent, fixed-rate Alt-A
mortgages and commercial mortgages acquired and originated by
its mortgage and commercial operations. The warehouse lending
operations provide short-term financing to mortgage loan
originators.
The credit crunch crisis has shaken IMH up a bit; the company,
too, has laid off workers and its profit situation is still
feeling around for the bruises. Still, gross profit in its
last quarter (ending in March) still registered in the
$13-million bracket. Something for small cap watchers to
consider: while the stock had the 10-dollar mark in its sight
during the last 52 weeks, its current reading around $1.53 is
still an improvement over its 95-cent gully.
Headquartered in San Diego, Accredited Home Lenders Holding
Company
(Nasdaq: LEND) operates in both the United States and
Canada.
LEND originates, finances, scrutinizes and sells non-prime
mortgage loans secured by residential real estate. Like the
other companies on which we concentrate in this piece, it
focuses on borrowers who may not meet conforming underwriting
guidelines due to higher mortgage loan-to-value ratios, high
levels of consumer debt, limited credit histories or past
credit difficulties. LEND originates mortgage loans primarily
based on borrowers’ willingness and ability to repay the
mortgage loan and the adequacy of the collateral.
While declining net profit margin might provide red flags to a
less-than-intrepid investor, others with a greater appetite
for risk might take cheer from news that the company did
declare a dividend on its preferred shares in the third
quarter, indicating some solidity.
Indeed, at one time during the past 52 weeks, LEND sniffed the
rarefied air of $37.08 before the price experienced a nosedive
to only $3.77. Its current plateau remains under the radar,
and under the 11-dollar mark.
With the latest announcements from the Oval Office and the top
bank in the land, hope springs eternal that the three
companies explored here will be able to pull themselves out of
the ditch, and gain back some of their earlier strength.
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