Appearance Matters: Delta Financial

I don't know much about Delta Financial (DFC), other than the fact that Mohnish Pabrai owned it earlier this year. Here are some of its positive attributes:

1. They have an LTV of 78%. That's not exactly Wells Fargo worthy, but its better than Nova Star Financial at 82%.
2. 87% of originations are fixed rate, and they discontinued ARM originations in the second quarter 2006.
3. They sold $950M loans on a servicing released, non-recourse basis. A deal of that magnitude, in this environment, even at a loss, speaks to DFC's credibility relative to other subprime originators.

But that's the problem: they look good compared to other subprime shops. DFC's most pressing problem, lack of financing, results from a poor public image due to their affiliation with less cautious subprime lenders. They also carry a stigma due to predatory lending charges that were settled in 1999. According to a representative of Fair Finance Watch, a community advocacy group:

"If you did word association, I would say 'predatory lender,'" said Matthew Lee, the executive director of Inner City Press/Fair Finance Watch, a community advocacy organization based in the South Bronx. "They're still one of the most vicious and biggest subprime lenders."

Such opinions reinforce the conviction that all subprime firms deserve the same label: Bad News. Prospective investors see a company with no short term financing recourse, but that requires constant financing to survive, and, naturally, they shy away. Meanwhile, DFC's price continues to slide, seemingly confirming that DFC is just like any other subprime lender. Former clients, who normally purchase loans from DFC, watch the proceedings and question its ability to continue operations. As a result, regardless of underlying asset quality, no one wants to buy their structured products.

I will pursue more in depth research into DFC, but it will be interesting to see how much real influence market perception will have on company fundamentals.