Thursday, December 6, 2007 0 comments ++[ CLICK TO COMMENT ]++

Delta Financial (DFC) To Ride Off Into the Valley of Death...aka Bankruptcy

Well, it isn't much of a surprise shareholders or anyone following the company but Delta Financial (DFC) said that it will seek bankruptcy protection. Quick notes from MarketWatch:

Delta Financial Corp. said on Thursday that it plans to file for bankruptcy protection, becoming the latest mortgage lender to succumb to the subprime crisis that's swept the industry this year.

DFC announced last month that it was getting help from hedge fund firm Angelo Gordon & Co., but that agreement depended on the company selling roughly $500 million of loans on to other investors in a securitization, or arranging other financing for the loans.

On Thursday, Delta said it couldn't complete the securitization. Warehouse lenders, which provided short-term financing for Delta's loans before they're securitized, have now told the company it has defaulted.

The fate of Delta Financial is no differen than the countless other mortgage lenders that have gone bankrupt this year. I decide to take a small position in DFC because their clients seemed safer, with more fixed-rate loans and away from bubble areas like California.

The deal with Angelo Gordon is now off and Delta said it will stop taking new mortgage applications and file for bankruptcy protection from its creditors. Delta offered mortgages to subprime, or less creditworthy, borrowers. However, the company focused on fixed-rate loans, rather than more exotic adjustable-rate products.

The problem for Delta was that the credit market dried up and they couldn't secrutize their loans. The thing about mortgage lenders is that their business will cease to exist if they can't sell loans. It's one of those businesses where there really isn't anything to do if business dries up or you can't offload your loans. This is a risk with homebuilders as well. Homebuilders can literally turn to zero if they don't build new homes.

Here is what I wrote when I took my position in Delta (it was around 2% of my small portfolio):

In any case, I decided to take a very small speculative position in DFC @ $5.50. The stock is already down 20% but it can move in either direction quickly. This is the type of position that can go to zero or go up 100% very quickly. It's totally dependent on news and credit market conditions. I am wondering whether I should add to the position. It's definitely very risky but has the market oversold the danger?

I guess we now know the answer to question I posed huh? I said this is the type of stock that can go to zero and it actually did turn into the most important number in mathematics: zero. I had been pondering what to do with DFC for a while. Since my position was very tiny, I didn't feel compelled to do anything. My biggest mistake is probably just going into it without understanding their business very well. I've been looking into mortgage lenders and I just don't understand them.



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