Mortgage Woes Strip Thrift's of Stock Value

With banking companies having a high concentration of housing-related assets trading at a steep discount these days, that doesn't necessarily mean it's time to jump in and buy up their stocks, according to Friedman Billings Ramsey.

Recently, FBR took a look at two California thrifts that are trading "at a material discount to book values," Downey Financial and FirstFed Financial. Because of the worsening California housing market, FBR says it is too early to take a position in the companies. But FBR also said that both companies should survive the crisis and should be good investments for the long term. In comparing the two, FBR said Downey has the better franchise, citing its strength in the state's deposit market. But FirstFed has a better credit profile, FBR said. That's because FirstFed is holding fewer of the riskier loans originated in 2006 and 2007. But both companies have portfolios of pay-option ARMs. The recent housing crisis left borrowers with very little skin in the game, analyst Paul Miller's team noted. "Many borrowers either lied about their current income or layered a second-lien loan (HELOC) on top of the first and cannot afford the mortgage payments," FBR's report said.

"Given their strong capital position, both companies should make it through the crisis, although with lower book values and smaller lending platforms," FBR said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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