That's simply gambling, betting on interest rates like you would bet on a commodity.
What made MSRs interesting in early 2013 was that you could calculate very high IRRs buying them at market rates without making any upward assumptions about future interest rates. That's no longer the case.
What value would the DTA ever have to IMH? Won't they be able to use the net operating losses to offset future earnings? They clearly won't make enough from earnings to even put a dent in the $489 NOL. Therefore the DTA - which does eventually expire worthless - is effectively a sunk asset that will never realize any value?
Isn't it a little late in the cycle to just start to realize the value of MSRs now? MSRs were a big story early 2013 because they were unwanted and hugely undervalued. Now you have four or five entities that are focused on buying them from banks, and that in turn shot up the prices that everyone pays for those MSRs.
My point here: where exactly is IMH going to buy any quantity of "cheap" MSRs? The asset class is getting fairly valued now.
They are taking huge losses on the mortgage origination business not breakeven. There isn't a risk of running out of cash, but remember that mortgage origination is a commodity business that normally gets a two to three times earnings valuation. It looks to me like it will be two years to right-size that business back to profitability, and the earnings will be far lower than during the refinance boom. Multiply those future projected earnings times three. It's not a great upside.
According this bond default calculator, if you leave price blank, enter risk of default at 1% (very low estimate) and enter 2 payments per year and 120 payments remaining and treasury rate at 5% (projecting forward) it calculates the price at around $17.
So this tends to confirm your thesis.
The MSRs are a good business, but the mortgage origination business is in a freefall and taking on signficant losses. This stock is dead money until that situation is under control.
No, a fear of bankruptcy would hit the common shares before the preferred. It looks more like the market anticipates more capital being raised. Is that something they have discussed?
The problem is their market is collapsing. Declining sales means likely negative or no income for a while. How do they fund any dramatic R&D? What products turn around the sales decline?
It's not so much an imminent bankruptcy as it is a long-term malaise.
Delisting should crash their shares and you might trade around that event, but I don't see any good fundamentals here for a sustained recovery to a fair valuation.
If they reserved in full I don't think the stock would go up even 25 cents. The non-cash losses associated with the real estate trusts are simply mark to market accounting on some residual equity investments IMH has in those trusts. Why do people focus on these things? They are a total non issue.
What drives this company's value is the operating earnings from real estate services and mortgage refinance and originations. The last earnings report was a bloody catastrophe. That's the one and only part of the income statement IMH needs to fix.
My general impression is that there ia massive conspiracy among the banks to not take losses on their defaulted loans. A lot of these homes are sitting unforeclosed in a limbo state, with the defaulter living for free in the property. And banks then foreclose in an orderly fashion over many years, so they can take their losses in a way that doesn't put them into negative book value. As things turned out, real estate turned, and when they liquidate the property they take it back and the bank then sells at breakeven or a profit. So it may be that the losses will roll through for quite a while.
Those losses have very little to do with how IMH is being valued. 95% of the collapse of this stock has to do with the fact that their operating earnings for mortgage lending went hugely negative.
How would an acquiring bank value FMAR? Probably it would value on the basis of the existing accounts, and those have value. You cannot say that installed base is worthless.
The negative book value is because of one time events. It's not a forward trend.
Inability to make positive earnings here is unfortunate. They received too much from refinancings and that has gone away. But if they can even get to breakeven by increasing fees that is enough to let them go to positive earnings as economy recovers.
The real short-term event is the preferred shares that are due at end of year. But that's only about $15M of par value remaining to be paid? It seems pretty realistic that they can rollver to new preferred shares with a sweetener to extend the maturity.
The important question here is how can we value a bank that has negative earnings and book value.
What are some specific CUSIPs of Puerto Rican bonds that you think show the trend of the group?
Take GAAP earnings and back out non cash losses, and that means a lot. Because the source of the losses will eventually stop, and nothing in those losses will cause any liquidity crisis that puts them out of business. Those GAAP losses just mean we don't pay taxes for a long long time. On a pure operating basis they make money.
How do you get $2 market cap when the company has $2.50 in operating earnings excluding non cash historical losses? Those accumulated losses means they won't be paying taxes for years, and the earnings fall straight through to cash flow.
Even if they have $1.50 normalized operating earnings, after removing the refinance volumes, that is still a PE of 5 against the current stock price.
Justify a $2 stock price.
What valuation technique are you using to guess at a 40 cent basement price?
How do you value a bank with negative book value and negative earnings?
If we valued them based on what other banks pay on a per customer basis or for deposits what would be the enterprise value of the bank?
When will BAC settlement be paid in?
Will regulator allow a special dividend?