Several analysts believe that Bank of America
could settle MBIA's claims
for $2 billion to $3 billion. However, any settlement decision by the bank must also take into account the other mortgage-putback settlements it is negotiating.
Getting back to Flagstar, the company's stock was already down 17% this year through Tuesday's close at $16.01, pulling back from a 280% return during 2011.
Flagstar had $14.1 billion in total assets as of Dec. 31. The company reported 2012 net income available to common stockholders of $223.7 million, or $3.74 a share, compared with a net loss of $198.9 million, or $3.62 a share, in 2011. The EPS figures are adjusted for the stock's 1-for-10 reverse split in October.
During 2012 the company booked $990.9 million in gains on loan sales, as its mortgage lending business came roaring back. In 2011 gains on loan sales totaled $300.8 million.
But investors sent the shares down 12% on Jan. 24 after the company reported fourth-quarter results. Gains on loan sales declined to $239 million from $334.4 million in the third quarter, reflecting declines in lending volume and also in secondary market spreads. (See
Short-Term Mortgage Pain Is Long-Term Gain for Banks
for a discussion on the effect of rising long-term rates on banks' gains on the sale of mortgage loans.)
FBR analyst Paul Miller rates Flagstar "outperform," with a $25 price target. Miller said in a report Jan. 25 that he remained "confident the company's core profitability and momentum in the mortgage business remains high and will outpace remaining legacy costs." Flagstar reported a tangible book value of $18.97 a share as of Dec. 31, and Miller estimated that tangible book value would rise to roughly $25 by the end of 2014.
Following Rakoff's ruling on the Assured Guaranty suit, Miller on Wednesday reiterated his view that tangible book value could hit $25 by the end of 2014, "even assuming moderating gain-on-sale margins and elevated legacy costs over the next two years."
If the MBIA suit against Flagstar ends up with a similar result to the Assured Guaranty ruling, "it broadly equates to a worst-case loss of $1.50 per share to $2 per share" for Flagstar, according to Miller. The analyst also expects Flagstar to pay $17 million in additional expense reimbursements to Assured Guaranty.
Flagstar had $193 million in mortgage-putback reserves as of Dec. 31. Miller said that "backing out our estimated total loss exposure from both MBIA and Assured of about $182 million, we have already built into our model an additional $338 million in losses," which he called a "conservative" estimate.
Even with a reduced level of profitability for the mortgage business, FBR estimates that Flagstar will report $819 million in loan-sale gains this year. Miller estimates that Flagstar will earn $3.92 a share this year, although he also estimates that EPS will decline to $3.40 in 2014, with a sharp decline in gains on mortgage-loan sales.
For investors who think the housing recovery and mortgage-lending boom will continue, it may be a good time to jump into Flagstar's shares after such a big slide.
-- Written by Philip van Doorn in Jupiter, Fla.