Opteum Loses $33.9 Million in Fourth Quarter; Trouble Brewing Outside of Subprime?

Opteum Inc. reported late yesterday that it lost $33.9 million in the fourth quarter of 2006, driving a $49.5 million consolidated net loss for the full year. The REIT is the latest lender to report negative operating results, but unlike many other lenders reporting losses, the company is not heavily invested in the subprime mortgage market.

“There is nothing we dislike more than reporting negative operating results,” said Jeffrey Zimmer, chairman and CEO.

“The company had one of the best records of earnings and dividends among our New York Stock Exchange-traded peer group during 2004 and 2005, but in 2006 we underperformed much of the peer group, which was understandably reflected in our stock price. Challenging business and operating conditions during 2006 resulted in inferior financial performance in both of our business units.”

Opteum’s two business units include its investment portfolio activities and a mortgage origination platform, Opteum Financial Services, LLC.

Zimmer said Opteum’s investment portfolio produced losses in the back half of 2006, as higher borrowing costs surpassed the gross yield on Opteum’s financial assets. The company’s OFS origination business has reported a loss for four consecutive quarters.

Loan loss reserves increased quickly
The company provided numerous reasons for its current financial troubles, including the effects of a substantial increase in loan loss reserves during the fourth quarter. Opteum reported a total loan loss provision in 2006 of $13.3 million; of that amount, the company said it reserved $7.3 million in the fourth quarter of 2006 alone. Alluding to a potentially rough road ahead, Opteum said it expects to observe a significant increase in early payment defaults and associated repurchases on its fourth quarter originations.

Opteum’s credit facililites are provided under a master loan purchasing agreement with a Citigroup subsidiary, and Opteum said it had succesfully renegotiated the terms of its warehouse line during 2006 to ensure it continued to meet liquidity requirements. In addition, and as part of the company’s renegotations, Opteum said it had provided Citi with a 7.5 percent equity stake in its OFS business unit.

“Despite the company’s recent operating losses, we are optimistic about the opportunities that lie ahead in 2007,” said Zimmer. “Actions have been taken and additional actions are being evaluated to create a path to profitability in the near future.â€?

Part of the company’s efforts to regain solid financial footing involved laying off nearly 20 percent of its workforce at Opteum Financial Services, where the company said it had eliminated 194 positions during 2006 in an effort to reduce overhead.

“Over the course of the last 45 days, a number of sub-prime mortgage originators have announced significant increases in loan loss provisions, with a few even ceasing operations,” Zimmer said.

“In contrast, OFS has limited exposure to the subprime market, with subprime originations representing only 4.3 percent of OFS’s 2006 mortgage production volume. Unfortunately, it appears that the recent decline in the stock prices of sub-prime lenders has had an impact on the stock prices of prime and Alt-A lenders as well, as described by the many equity analysts who have released research reports on mortgage lenders over the last two weeks.”

For more information, visit http://www.opteum.com.