Comments on: Now you tell us… http://www.footnoted.org/buried-treasure/now-you-tell-us/ Michelle Leder's guide to what's hiding in SEC filings Fri, 21 Nov 2008 17:45:40 +0000 http://wordpress.org/?v=2.6.3 By: Michelle Leder http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3974 Michelle Leder Tue, 04 Dec 2007 00:21:17 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3974 On a somewhat related note, if you missed <a href="http://www.nytimes.com/2007/12/02/world/europe/02norway.html" rel="nofollow">this story</a> in the NY Times over the weekend about how the crisis is impacting the town of Narvik, Norway, it's definitely worth the read. I particularly liked the line about how just because they're in the middle of nowhere -- well, above the Arctic Circle -- they're not stupid. Nearly 20 years ago, I spent about a gazillion hours on a train to travel to Narvik and it was a truly amazing place. The people were incredibly friendly and welcoming. And the midnight sun was fantastic -- I have a pix of me overlooking the Narvik harbor at around 11:30 pm and it looks like mid-day. To think that this city wound up on the receiving end of some overpriced real estate in Florida and other places is pretty sad. On a somewhat related note, if you missed this story in the NY Times over the weekend about how the crisis is impacting the town of Narvik, Norway, it’s definitely worth the read. I particularly liked the line about how just because they’re in the middle of nowhere — well, above the Arctic Circle — they’re not stupid.

Nearly 20 years ago, I spent about a gazillion hours on a train to travel to Narvik and it was a truly amazing place. The people were incredibly friendly and welcoming. And the midnight sun was fantastic — I have a pix of me overlooking the Narvik harbor at around 11:30 pm and it looks like mid-day. To think that this city wound up on the receiving end of some overpriced real estate in Florida and other places is pretty sad.

]]> By: Brian http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3972 Brian Mon, 03 Dec 2007 19:55:48 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3972 Dan, FICO scores are in the process of being thoroughly discredited as an indicator of mortgage credit risk. Take a look at the WSJ story today on the subprime loans being handed out to people with FICOs north of 700 or watch the currently unfolding HELOC disaster and see how many 700+ FICOs default. FICO is a very poor metric of Capacity and has no ability to factor in prospective increases in debt load (ie as in buying way too much house for your current circumstances - as is more likely to happen when you have stated income), nor does it take into account resets in morgage rates and what happens when you get to the end of an I/O or option ARM teaser period. I would be very wary of taking any comfort from the FICO score associated with a mortgage. Dan,
FICO scores are in the process of being thoroughly discredited as an indicator of mortgage credit risk. Take a look at the WSJ story today on the subprime loans being handed out to people with FICOs north of 700 or watch the currently unfolding HELOC disaster and see how many 700+ FICOs default. FICO is a very poor metric of Capacity and has no ability to factor in prospective increases in debt load (ie as in buying way too much house for your current circumstances - as is more likely to happen when you have stated income), nor does it take into account resets in morgage rates and what happens when you get to the end of an I/O or option ARM teaser period.

I would be very wary of taking any comfort from the FICO score associated with a mortgage.

]]> By: Dan http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3954 Dan Sat, 01 Dec 2007 17:41:40 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3954 I completely understand where you are coming from, and I found it interesting as well. This is something they should have disclosed up front for shareholders to see instead of hiding it away deep in the 10K. I appreciate your diligence. I completely understand where you are coming from, and I found it interesting as well. This is something they should have disclosed up front for shareholders to see instead of hiding it away deep in the 10K. I appreciate your diligence.

]]> By: Michelle Leder http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3953 Michelle Leder Sat, 01 Dec 2007 16:43:05 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3953 Point taken -- didn't mean to sensationalize. Just found it interesting that at least based on my review of the filings, this was a new disclosure. And since at its' heart, this site is about the quality of earnings, more than the quantity, I thought it was an interesting find. Point taken — didn’t mean to sensationalize. Just found it interesting that at least based on my review of the filings, this was a new disclosure. And since at its’ heart, this site is about the quality of earnings, more than the quantity, I thought it was an interesting find.

]]> By: Dan http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3948 Dan Sat, 01 Dec 2007 01:37:57 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3948 You are correct. But isn't that a key factor in evaluating a loan's quality? The 4 C's of credit are: Character(integrity): the main factor in evaluating character has to be credit score, you are evaluating the credit character or track record of the person you are lending to. They did this. Capacity(cash flow): how capable are you of paying. We have to go with verifying debt to income and this is one place where BKUNA slacked off obviously. They did say they required lower debt-to-income ratios which is a little better, unless the borrower is stretching the truth. Capital(collateral,net worth): They did asset verification and they took a higher LTV so are OK on this front. Conditions(of the borrower): they required "additional employment/business information" so they made an attempt to further evaluate conditions. They obviously did a less than perfect job of evaluating borrowers, but I think there is a tendency in today's environment to get carried away with what the effects of this marginal lending will be. Bank's are built to withstand high stress situations and BKUNA is well capitalized, they far exceed federal capitalization standards. The losses they end up taking in a really bad situation like this still don't threaten their ability to operate as a going concern. People don't realize that these earnings losses are in part due to huge loan loss reserves that are being built up. This is basically done to protect capital and smooth out future earnings. When these losses do hit they will be in position to absorb them and at that point will already being moving forward writing profitable business with better standards. Anyway, I do agree with the point you are trying to make, I just know it is easy to get carried away and sensationalize poor lending that might actually be average to slightly below average lending. The current environment helps fuel this tendency. You are correct. But isn’t that a key factor in evaluating a loan’s quality?

The 4 C’s of credit are:

Character(integrity): the main factor in evaluating character has to be credit score, you are evaluating the credit character or track record of the person you are lending to. They did this.

Capacity(cash flow): how capable are you of paying. We have to go with verifying debt to income and this is one place where BKUNA slacked off obviously. They did say they required lower debt-to-income ratios which is a little better, unless the borrower is stretching the truth.

Capital(collateral,net worth): They did asset verification and they took a higher LTV so are OK on this front.

Conditions(of the borrower): they required “additional employment/business information” so they made an attempt to further evaluate conditions.

They obviously did a less than perfect job of evaluating borrowers, but I think there is a tendency in today’s environment to get carried away with what the effects of this marginal lending will be. Bank’s are built to withstand high stress situations and BKUNA is well capitalized, they far exceed federal capitalization standards. The losses they end up taking in a really bad situation like this still don’t threaten their ability to operate as a going concern. People don’t realize that these earnings losses are in part due to huge loan loss reserves that are being built up. This is basically done to protect capital and smooth out future earnings. When these losses do hit they will be in position to absorb them and at that point will already being moving forward writing profitable business with better standards.

Anyway, I do agree with the point you are trying to make, I just know it is easy to get carried away and sensationalize poor lending that might actually be average to slightly below average lending. The current environment helps fuel this tendency.

]]> By: Michelle Leder http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3946 Michelle Leder Fri, 30 Nov 2007 23:24:52 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3946 I agree that credit scores are important, but (and please correct me if I'm wrong) isn't that just an indicator of how the person has done at paying their bills in the past? I agree that credit scores are important, but (and please correct me if I’m wrong) isn’t that just an indicator of how the person has done at paying their bills in the past?

]]> By: Dan http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3945 Dan Fri, 30 Nov 2007 23:07:42 +0000 http://www.footnoted.org/buried-treasure/now-you-tell-us/#comment-3945 Good find,but, I wouldn't discount the last line as much as you are: “While these loans generally represent more risk than full documentation products we compensate by requiring higher credit scores, lower LTVs, lower-debt-to-income ratios and additional employment/ business information.” You can't fake a credit score and I believe that is a pretty good indicator of the ability to repay debt. Isn't that why we have credit scores? Good find,but, I wouldn’t discount the last line as much as you are:

“While these loans generally represent more risk than full documentation products we compensate by requiring higher credit scores, lower LTVs, lower-debt-to-income ratios and additional employment/ business information.”

You can’t fake a credit score and I believe that is a pretty good indicator of the ability to repay debt. Isn’t that why we have credit scores?

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