SAN FRANCISCO (MarketWatch) — Shares of Luminent Mortgage Capital Inc. plummeted 75% on Tuesday, plunging after the home-loan investment company warned that it’s been hit by lots of margin calls as the secondary mortgage market “seized up.”
Late Monday, Luminent
said its board of directors suspended payment of its second-quarter dividend. The board is also considering a “full range of strategic alternatives” to improve the company’s liquidity and preserve shareholder value.
Luminent shares fell $3.30 to close $1.08 on Tuesday. The stock was halted on Monday.
“Effectively, the secondary market for mortgage loans and mortgage-backed securities has seized up,” Luminent said in a statement. “As a result, Luminent is simultaneously experiencing a significant increase in margin calls on its highest-quality assets and a decrease on the financing advance rates provided by its lenders.”
UBS downgraded Luminent to sell from neutral and cut its price target to zero from $9, saying that while the company is considering strategic alternatives, it sees limited chance of success in light of the current environment.
Management may be unable to restore investor and lender confidence after recently claiming to have “ample liquidity to manage its business,” but then turning around and suspending its dividend and warning about margin calls. Margin calls are demands for more cash or collateral to back loans.
Luminent is a real-estate investment trust that invests in a range of mortgages and mortgage-backed securities, which it buys in the secondary market.
The company was set up in April 2003 and started by investing in so-called agency mortgages that conform to the standards of government-sponsored enterprises such as Fannie Mae
and Freddie Mac
It also bought AAA-rated parts of mortgage-backed securities.
However, in 2005, Luminent expanded its strategy and started investing in mortgage-backed securities with credit ratings below AAA. This year, the company also got into collateralized debt obligations, or CDOs.
CDOs are a bit like mutual funds that buy asset-backed securities. CDOs were used to purchase a lot of lower-rated bits of mortgage-backed securities in recent years, helping to fuel the housing market boom.
Luminent has taken on very short-term debt to pay for its mortgage positions, Zack Gast, an analyst at the Center for Financial Research and Analysis, said on Tuesday.
But the value of some of Luminent’s assets has been reduced by its lenders. That caused these backers to ask the company to put up more capital, Gast explained.
Luminent had $13 million in cash at the end of June and margin calls have got worse in recent weeks, Gast noted, adding that the company probably cancelled its dividend to preserve cash.
“It’s all going to come down to the valuation of the assets they hold and what the market will pay for those assets,” Gast said. “Luminent will try to unwind their holdings, but this is an extremely difficult market in which to do that.”
Later on Tuesday, Luminent issued another statement describing its holdings in more detail.
“Prime” whole loans made up most of its assets as of June 30. These mortgages had an average FICO credit score of 715 and a loan-to-value ratio of 71% on average, after mortgage insurance, the company said.
Luminent also said its credit process is stringent and noted that it independently validates property values on every loan it buys.
“As a result of its due diligence, Luminent has experienced lower delinquencies than the prime mortgage market,” the company said. “The remainder of Luminent’s portfolio consists of mortgage-backed securities, the vast majority of which is rated AAA.”
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