Wednesday, August 8, 2007

LEND update.

LEND, mentioned at 6, ran to 8.64, and now is back to 6.

What's going on? It's apples to oranges but try and follow me.

There are still worries about the deal going through; highlighted because FNM and FRE may, according to some reports, increase the cap on the mortgages they buy. If Fannie or Freddie buys your mortgage, they only can spend $417,000K, on a "conforming" loan. Why does this matter? The rate on a prime conforming 30 year is about 6.6%. A non-conforming (ie non Fannie or Freddie) is 7.44%. So that makes housing more affordable.

What's that have to do with LEND? It could be argued, if this passes, (or so the street says), that that would be a substantial change in the mortgage market, and a (MAE) "material adverse effect." Whose arguing that? The buyers of Sallie Mae (SLM 50.08); who are JC Flowers, JPMorgan, and Bank of America. The takeover price is $60, and it's a $25 billion dollar deal. That 20% is the price of uncertainty, though SLM adamantly states the deal must go forward.

So if the cap gets raises, (as a couple powerful people in Congress want) then the buyers of SLM will try and back out of the deal. So the reasoning on the street is-if they back out on that deal, what's to prevent Lone Star from backing out on their deal with LEND? That's your apples to oranges.

Lone Star's deal for LEND is much smaller, only $400 million, and not subject to financing and according to some is iron clad. And it's also a small deal for Lone Star to do. And OFTHEO (Office of Federal Housing Enterprise Oversight) would have to give the OK to change the mortgage cap, and who knows what else. Even if passed, it is in the area of prime mortgages not subprime. But the market is still queasy, and despite any logical arguments, the market is more fixated on the stock price than details in documents.

So you make the call. But that's what the street is saying.

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