IMO, RHG shareholders would be better off if management could sell their entire lending book, holus bolus, at a reasonable price. However, given present market conditions, that would seem unlikely.
If they continue to convert short-term debt to long-term MBS's (as they're doing with the present $300m) at >53bp over bank bill rates, they will make virtually no profit or a loss over the lifetime of those loans. It would be death by a thousand cuts.
When you see brokers putting values of 40c per share and that sort of thing on the mortgage book, they're looking at what it might be worth if RHG could either find a buyer for the whole book, or if they could get their margins down closer to the 30-40bp over bank bills. The more they parcel off into MBS's at 53bp+, the more they would need to get away at some later point in time at, say, 20bp, in order to end up with an average 30-40bp (which might be profitable for shareholders). I think the days of 20bp for mortgage originators is gone for a very long time to come.
As a result, the only hope for value to RHG shareholders is: (a) a 100% return to pre-credit crunch conditions; or (b) a buyer of their whole book at a reasonable price, which allows them to discharge their entire debt and have something left over for shareholders.
The brokers are living in fantasy land, IMO. RHG will struggle to find a buyer for their book at any reasonable price in the present market. Bear in mind that the sub-prime resets in the US haven't even reached their peak yet. Any potential buyers of such a big book are already looking at what exposure they will have to take onto their own books from their own activities. Most will not have the time, nor inclination, nor available capital to buy RHG's book. Any vultures looking at the book will be putting in lowball bids - you can bet on that!
RHG Price at posting:
0.0¢ Sentiment: Sell Disclosure: Not Held
