RAMS sheared

RAMS Home Loans has taken a battering over the last couple of days. Shares are about half what they hit when they first listed.

The reason is tied to the subprime problems in the US. Despite not having any crap loans itself (it's all insured, which probably means if the loans default RAMS isn't on the hook for them), its costs are higher. Basically, RAMS lends money out, turns the loans into bonds and sells them to bond investors. It makes its profit from the difference between what it charges borrowers and what it has to pay the people who buy its bonds.

The recent subprime issues in the US has made everyone much more nervous about bonds. Since it's a matter of demand and supply, lower demand means RAMS has to offer higher rates to bond buyers. Since their variable rates are based on the RBA rates, the rise in their funding cost has NOT been matched by an increase in what they charge borrowers.

Result: higher costs --> lower profit --> lower share price.

Just one example of how a seemingly faraway thing like US mortgages defaulting can affect us.
Alex

Rams home loans rammed

Rams home loans recently listed on the asx for $2.50.
Yesterday it closed at $1.75.
Due to the American subprime debarcle, RHG is really being rammed today.
Lowest so far today is $1.19 and the volumes being traded is phenominal.

Eek , I'm with Rams

Does it mean my loan is going to crash?

There's an article here

(And I've combined two threads)

Kenster said:

Eek , I'm with Rams

Does it mean my loan is going to crash?

Click to expand...

no, it just means your home loan is now only worth half of what it was

Surely things aren't that bad for RAMS ... are people over reacting ?
Is it a share buying opp ?

Patosan said:

Surely things aren't that bad for RAMS ... are people over reacting ?
Is it a share buying opp ?

Click to expand...

Well, the profit warning came from RAMS itself, so obviously management thinks it's bad enough that they have to disclose it.

Depends what you think the credit market will do. If it calms down, RAMS shares might come back up. But if you're that confident you might buy Bear Stears or Goldman shares instead. The overreaction comment can extend to everything in the bond market right now. If you think it's an over-reaction you can always buy. I think there are lots of bargains out there, ASSUMING the market goes back to normal.

(Or you might be buying into the NASDAQ in the 4000s because it's off its highs of 5,200.)
Alex

I'm using the Rams LOC to pay for outgoings and capitalising interest when cash is low.

Wonder if there is any circumstances that Rams has to tighten up cash out (to maintain their cash flow), not letting their clients redrawing?

If this situation ever happens, it means I won't be able to meet my financial obligations. When things hit the fan...

Kenster said:

I'm using the Rams LOC to pay for outgoings and capitalising interest when cash is low.

Wonder if there is any circumstances that Rams has to tighten up cash out (to maintain their cash flow), not letting their clients redrawing?

If this situation ever happens, it means I won't be able to meet my financial obligations. When things hit the fan...

Click to expand...

The brokers can comment more on this, but I don’t think they can prevent you from drawing on a LOC that’s already in place. At least at this point they’re still making loans.

This is basically how a liquidity problem will affect property markets. Mortgage companies and banks are not as able to make loans or can only do so at higher rates because of more expensive funding, and they may have to tighten lending criteria. Which means not as many loans will be made, thus people can’t afford to pay as much for properties as they used to.

I’m currently looking at buying my PPOR, and I determined a certain level at which I could make the repayments. I then asked myself what I would do if the market dropped 10%. My answer: I’ll spend the same amount of money and just buy a nicer place.

If I think like that, imagine how many inexperienced buyers just said ‘we’ll take as much money as the bank will lend us’.
Alex

Hi Alexlee,

I haven't been following the individual shares, some would be stronger than others though tainted by the same trouble.
Which do you feel are the better ones that have suffered a significant drop ?
You mentioned Bear Stears or Goldman ... any others ?

Also if I buy in the Oz market rather than the US which brokers do suggest ?

Patosan said:

Surely things aren't that bad for RAMS ... are people over reacting ?
Is it a share buying opp ?

Click to expand...

Surely if huge volumes are being traded then there must be buyers out there buying up huge amounts at relatively low prices - relative to recent prices. But todays low price might be tomorrow's high price!

Patosan said:

Hi Alexlee,

I haven't been following the individual shares, some would be stronger than others though tainted by the same trouble.
Which do you feel are the better ones that have suffered a significant drop ?
You mentioned Bear Stears or Goldman ... any others ?

Also if I buy in the Oz market rather than the US which brokers do suggest ?

Click to expand...

Not making specific calls, it's just that the US investment banks have been hammered lately because of the perception that they will lose money from the liquidity problems.

I honestly don't know which ones are better. My own experience is that most investment bank balances sheets are so convoluted that it's very difficult even for experts to know all the risks.
Alex

http://abc.net.au/news/stories/2007/08/14/2004533.htm
IMHO..
I would be very carefull with something like this,they can go both ways
A 21% drop in one day,and with those volumes,the shareholders of this
company must know something to trade all their holdings in one day ..
$1.38..
willair..

willair said:

... with those volumes,the shareholders of this
company must know something to trade all their holdings in one day ..
$1.38..

Click to expand...

I would counter that any shareholders who REALLY knew anything would've been long gone before today ... today is everyone else.

No idea what's ahead.

Patosan said:

I would counter that any shareholders who REALLY knew anything would've been long gone before today ... today is everyone else.

No idea what's ahead.

Click to expand...

I would not have a idea what can happen,but i do wonder how many more will line up for a haircut..willair..

Patosan said:

I would counter that any shareholders who REALLY knew anything would've been long gone before today ... today is everyone else.

No idea what's ahead.

Click to expand...

Hence the IPO

Seriously looking at their announcement, it seems as though a majority of their funding book is short to medium term US debt market based... while the lending book is long term res mortgages... isn't it corporate finance 101 to match long term liabilities with long term assets, and short term liabilities with short term assets??

Now its Bluestone's turn

LOW-DOC lender Bluestone has cited the US mortgage crisis as the reason for its move to hike lending rates by up to 0.8 per cent, predicting the nation's big four banks will have to do the same.

Bluestone is the first local home lender to lay direct blame on the sub-prime meltdown for a sharp increase in its funding costs, and then pass it on to borrowers.

The $3 billion lender told customers yesterday that interest rates on its products would increase in a range of 17-55 basis points, on top of last week's 25 basis-point rise in official rates announced by the Reserve Bank of Australia which would also be passed on. A half per cent rise is 50 basis points

Click to expand...

http://www.theaustralian.news.com.au/story/0,25197,22240105-643,00.html

TJamesX said:

Seriously looking at their announcement, it seems as though a majority of their funding book is short to medium term US debt market based... while the lending book is long term res mortgages... isn't it corporate finance 101 to match long term liabilities with long term assets, and short term liabilities with short term assets??

Click to expand...

Textbooks get thrown out during periods when people think 'this time it's different'. The whole S&L crisis in the US back in the 90s was because they lent out at 30 year fixed rates and had to pay depositors variable rates (which zoomed up).
Alex

Note that Bluestone is going to raise rates by MORE than the 0.25% RBA rate rise, while the mainstream banks will probably raise it by 0.25%.

Why the difference? While in Oz we don't use credit scores to determine what rate a borrower gets, we do split it into full doc, lo-doc and no-doc. In the last couple of years because of massive liquidity the difference between full doc and lo-doc rates have been very small. The difference is determined mainly by perception of risk in the market. In the last couple of years, bond buyers had thought that there isn't much difference between full doc and lo-doc.

Estatepreneur, this is the flip side of your question about fixed rates. VARIABLE rates don't always follow the RBA rate moves, either.

Now bond buyers are realising there are differences in the riskiness between full-docs and lo-docs. Hence why the lo-docs are increasing their rates by more than the full-docs (rates being a measure of risk).

To put it another way, Lo-doc interest rates SHOULD be higher than full-doc rates. If this credit mess gets worse, expect lo-doc and no-doc rates to rise faster than the official RBA rate.

An interesting question is what happens to the full-doc rates. Currently they're about 7.45%, but that includes discounts. The question is whether banks will protect their profit margins by decreasing the discount, or just eat the higher funding costs.
Alex

Hi Alex (et al)

I am sure I was talking to my dad about this a while ago ago (he lives in the US and in Canada depending on the weather). There was something along the lines of when Fanny Mae/Freddie mac being exempt from normal government regulation when they were about to be brought under it got veto'd by Bush... due to they were trying to cover up something or other (personally I could never believe they would try to cover anything up with them being politicians and all!)

will get him to re-email me the links. Did a quick google and came up with this from a while back.

Dont know if it helps. I'm going to email Michael Moore now.

http://72.14.253.104/search?q=cache...die+bush+blocks+fannie+mae&hl=en&ct=clnk&cd=2

lukentel said:

Hi Alex (et al)
I am sure I was talking to my dad about this a while ago ago (he lives in the US and in Canada depending on the weather). There was something along the lines of when Fanny Mae/Freddie mac being exempt from normal government regulation when they were about to be brought under it got veto'd by Bush... due to they were trying to cover up something or other (personally I could never believe they would try to cover anything up with them being politicians and all!)

Click to expand...

Fannie and Freddie are publicly traded companies but implicitly backed by the government. i.e. their bonds are considered safer than other corporate bonds because there is an implied promise that the govt will bail them out. When they were created, mortgage securities weren't that popular and these companies were SPECIFICALLY chartered to buy loans from banks and sell the bonds, with the implicit guarantee of the US govt.

The cover up was an accounting scandal that involved senior management fudging numbers to achieve bonuses for themselves and wasn’t really political. To restore confidence in the market, it is suggested that Fannie and Freddie should go in and buy more mortgage bonds. However, because they are under scrutiny for past (hopefully) transgressions, the govt isn’t really allowing them to do that.

Instead the Fed is going in itself.
Alex