Accounting & Tax

Feeling the Pinch, Centex Taps JP Morgan

The homebuilder realizes it may not be able to depend on asset-backed funding to support its mortgage business.
Stephen TaubSeptember 7, 2007

In yet more fallout from the credit crunch, Centex Corp.’s mortgage subsidiary has entered into a $450 million warehouse credit facility with JPMorgan Chase so that the homebuilder’s unit can continue to issue mortgage loans.

Until recently, Centex’s CTX Mortgage Co. subsidiary funded the origination of mortgage loans mainly by selling them to Harwood Street Funding I LLC, a special-purpose entity (SPE) consolidated with Centex’s financial-services segment, the homebuilder stated. But that source of funding may have dried up: “Beginning in August 2007, CTX Mortgage realized that it may not be able to rely on asset-backed funding vehicles, such as HSF-I, for its primary mortgage funding needs,” Centex explained in an 8-K filing on Friday.

Under the HSF-I facility, the SPE generally got the funds it needed to buy mortgage loans from CTX by issuing short-term securities. CTX Mortgage has cut the maximum amount of debt HSF-I can issue from $3 billion to $1.5 billion, according to the 8-K. Further use of HSF-I will depend on market conditions.

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In general, warehouse loans are made by banks to loan originators as a way to finance mortgages from the time they’re originated until the loan is securitized. Centex’s version will enable CTX to sell as much as $450 million worth of mortgage loans to JPMorgan and perhaps other banks on a revolving basis. Generally, the loans will be rebought by CTX, which will resell them to third parties.

In terms of accounting, CTX’s warehouse borrowings will be booked by the unit as its own short-term debt obligation and consolidated on Centex’s financials. In addition to the JPMorgan arrangement, CTX has a $200 million warehouse facility with another lender.

Centex is one of a growing number of homebuilders hurt by the recent downturn in the housing market. Beazer Homes USA also reported today that it is in a dispute with the trustee for its senior notes concerning whether the company defaulted when it delayed the filing of its June quarterly report.

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