Tuesday, August 09, 2011

Prime Time: Hudson City Bancorp Non-Performance Q2 2011

Hudson City Bancorp (NYSE:HCBK) has become an icon of traditionally run, prime-only, safe and sound regional banks.

Some time ago I took exception with the PR that Hudson City was spinning as it’s CEO, Ronald Hermance, appeared on a multitude of business and non-business media (Mad Money, CNBC, Bloomberg, Barron’s… even NPR) speaking of the merits of his banks “old fashioned” sound traditional lending practices which included never making subprime loans or other toxic affordability products.

Of course, Hermance downplayed his banks non-performing loan ratio which as of Q2 2011 stands at a not-so-respectful 3.01% of total loans with $914.2 million in delinquent loans, preferring instead to project the picture of a safe bank with only high quality loans and growing deposits.

While Hermance was making the rounds of media outlets and dropping talking points his banks big mortgages were going bad at a progressively higher rates.

The "investor" community must have been shocked when in late November of 2008, Hermance disposed of 2,173,847 shares at a $16.48... very near the peak price ever seen for the stock.

How could Hermance sell so many of his shares, especially in light of the sound practices and dramatic upside potential?... As Cramer put it, this story was "as Good as Gold"!

Well... in retrospect Hermance was smart to dump out of this train wreck as the bank's stock has been, more or less, in the dumper ever since.

Today, it seems clear that the housing decline did not skip Hudson City Bancorp and although it is true that they did not participate in subprime lending, the bank originated jumbo loans in a market (primarily the New York, New Jersey metro area) that was as overheated as any during the housing boom.

Big prime loans, even with low loan to values go bust in down economies and our current housing driven bust with significant declines to home prices makes matters worse.

I’ve been arguing for the better part of three years that although the traditional media and apparently general consensus has focused on subprime and other “toxic” mortgage products as the source for the credit tumult, the historic deterioration would by no means be limited to these “bleeding edge” products.

Before this massive housing collapse is complete, I expect to see new records set for prime defaults, be they prime-Jumbo ARM loans, prime-Jumbo fixed rate loans, prime-conforming ARM loans or prime-conforming fixed rate loans… we will see historic defaults across the entire spectrum of mortgage products.