Writedowns of Retained Interests Could be Next Shoe to Drop for Subprime Lenders

Implications: Retained interests from securitizations made up more than 75% of the shareholder's equity at NFI. Also, the company has elected to finance these securities. Demand, never very strong to begin with, has deteriorated severely in the last month. The company could be forced to recognize a sizeable writedown in its retained interests, which will reduce book value. Other lenders that have sizeable retained interest holdings include Countrywide Financial ('CFC') and Rescap Holdings (a subsidiary of GMAC).  

Analysis:  

Retained interests from securitizations made up more than 75% of the shareholder's equity at NFI. Also, the company has elected to finance these securities. Demand, never very strong to begin with, has deteriorated severely in the last month. The company could be forced to recognize a sizeable writedown in its retained interests. Other lenders that have sizeable retained interest holdings include Countrywide Financial ('CFC') and Rescap Holdings (a subsidiary of GMAC). The impairments are likely to be other-than-temporary, which would cause a reduction in book value.

Since NovaStar has financed these positions, it could also be subject to margin calls if valuations decline further. This has implications for the company's liquidity. Not suprising that the auditors have reservations