Catching up on a developing news story, Luminent Mortgage Capital Inc. disclosed on Monday that it has been facing "a significant increase in margin calls on its highest quality assets and a decrease on the financing advance rates provided by its lenders." The company suspended its second quarter dividend, cancelled its earnings call, delayed filing its 10-Q with the SEC, and saw its stock halted on the NYSE. The company then issued a second press release Tuesday, in an attempt to assuage investor and market concern. While characterizing current market conditions as an "overreaction" and stressing that the company's "business model has a proven track record of viability and success," Luminent also disclosed the following:
... prime quality whole loans comprised the bulk of its assets as of June 30. These loans had an average FICO score of 715 and a moderate loan-to-value ratio of 71% on average, net of mortgage insurance ... The remainder of Luminent's portfolio consists of mortgage backed securities, the vast majority of which is rated AAA. Luminent has no sub prime first loss exposure. Luminent is not subject to loan repurchase risk that is currently impacting certain loan originators in this environment.
Not exactly confidence inspiring -- a company holding no subprime or Alt-A and low CLTV whole loans, as well as a portfolio of AAA-rated mortgage securities, is facing margin calls and and an "unprecedented" contraction in liquidity? What's the real story here? A third press release in as many days came late yesterday, noting that Luminent had received default notices from two lenders:
Luminent Mortgage Capital, Inc. today reported that it has received notices of default from two repo lenders. The company is continuing to vigorously explore all of its alternatives with respect to its sudden liquidity issues resulting from the unanticipated and extraordinary disruptions in the secondary mortgage and national real estate markets.
There appears to be some question as to just where the margin calls in question are originating from, with one analyst noting that the company began to deviate from its usual investment strategy at some point last year and used short-term debt facilities to buy positions in various mortgage-backed CDOs. While the company has made it clear that it doesn't own subprime or Alt-A whole loans -- giving perhaps some the impression that Luminent isn't exposed to either credit sector -- it hasn't been nearly as forthcoming regarding the composition of its investment holdings, other than to say the securities are themselves rated AAA. If Luminent's securities investment strategy mirrored its apparently stringent approach to whole loan acquisition -- that is, only prime-credit, low CLTV mortgages -- what we've got is some leading evidence of a quickly worsening credit crisis. On the other hand, if the Luminent used short-term credit facilities to expose itself to the subprime or Alt-A credit markets, this may be the latest lesson in the inevitable tradeoff for higher yield: greater risk.