Update on failing mortgage stocks #1: FMAR

Since I first posted on FMAR on March 17th, the stock has fallen about 34% from $6.45 on 3/17 to $4.26 today, setting many record lows along the way. I had an interesting discussion about the company with an investor who told me that a smaller hedge fund was short FMAR.

I continue to think the fair value of the company’s stock is zero, which is to say I do not think the company, which has unwisely lent hundreds of millions of dollars secured by questionable collateral (including used boat loans!), will be able to survive the bursting of the housing and credit bubble

FMAR reported a 1st quarter loss of 52 cents per share, which was even worse than the $0.40/share loss that analysts were expecting.

FMAR’s situation is even more dire than the large loss the company actually reported. Specifically, its provision for loan losses seems way to small. REO’s are only being written down by 42%, while its loss reserves for its non-performing Alt-A loans is 18% of their collateral’s appraised value. That’s rather amazing considering that investors these days won’t touch performing Alt-A loans without a very significant discount.

The most fishy item in FMAR’s earnings report is that its loan loss reserves only increased by $1 million, from $12.8 to $13.8 million, despite the fact that FMAR has a loan portfolio of well over $800 million, and that REO and nonperforming assets are going through the roof, and the US economy is now in recession.

If a WAMU or a Countrywide were trying to get away with such unrealistic loan loss reserves, financial reporters and short sellers would be all over them. Instead the big banks are taking big charge-offs as they increase loan loss reserves. FMAR is clearly trying to hide the degree of its future loan losses by understating reserves, but it can only do this for so long.

The bottom line is that the company’s numbers are not an honest reflection of its financial situation. So while the company has fallen quite a bit on its very negative earnings reports, much bigger losses are coming when FMAR finally comes clean and takes a big write-off for future loan losses. From the looks of its balance sheet, such a write off would eliminate well over half of the company’s book value.


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