Take a look at the stock of First Federal, a local bank (FED). It has gone down from 69 to around 42.50 On Thursday, the company announced plans to buy back the stock to support the share price. The stock went up about 3 dollars that day. Today, on huge volume, the stock went down over 5 dollars. FED has lots of shaky loans and adjustable rate mortgages. The Board is borrowing money to support the share price. What happens if that borrowed money ends up buying over priced stock? More liabilities on the balance sheet and maybe the regulators start inquiring as to whether the bank as sufficient capital to support its deposits.
You won’t read about this in the LA Times, but it is one of the biggest local financial stories. As I reported Tuesday…
I hear:
1. The ARM business is very not regulated much.
2. Many borrowers want to pay less, so the ARM OR THE INTEREST ONLY PRODUCTS are very attractive.
3. Lenders or mortgage brokers get between 1 to 3 points on a mortgage, so they will offer them to clients without emphasizing the risks.
4. Many private companies made a lot of money with the ARMs and the interest only mortgages and they are still offering them. The are self financed or borrow from banks. Eventually, they will have a liquidity problems.
5. Two major companies lost most of their value in the market this week alone. Mostly in the subprime area (american mortgage and accredited loans).
