One thing you may want to consider when sizing your BOFI position is that over 50% of their mortgage loans are concentrated in one geographic area - Southern California.
When a major earthquake hits that part of the country BOFI may take quite a hit as only 10% of Californians have earthquake insurance.
Even a 60% LTV does not offer much protection to the lender when homes are destroyed and the owner walks due to a loan that exceeds the value of the land.
BOFI has so few employees (467) that I would think a major disaster in Southern California would be quite difficult for them to manage.
Thought of this the other day as I was paying my annual earthquake insurance bill and decided to look up how many folks have earthquake insurance.
I am not very familiar with earthquake insurance since I have never lived in an earthquake prone zone.
Is this something many banks require you to have insurance for in earthquake prone areas? I am just wondering maybe bofi requires their customers to carry insurance against this on their homes for the life of the loan. I would think this is something bofi would have considered and would have hedged against it in some way.
Homeowners typically get it to insure against a total catastrophe - mine has a 15% deductible, as an example, and I pay about $1000/year.
Not trying to be an alarmist - according to the BOFI annual report they have about $4B in single family and multi-family mortgages - 66% are in California (50% in S. Cal. & 16% in N.Cal.) So let’s say $2B in Southern California mortgages. Say the average mortgage is $400,000 - that would mean they have about 5000 single family plus multifamily homes in Southern California with mortgages. (I hope I am doing the math correctly.) So if 5% of the structures were destroyed they would have 250 mortgages go down the drain at $400,000 each or $100M could be lost. (the numbers are on pages 4 and 5 of the 2015 Annual report)
On page 31 of the annual report it says that net income for 2015 was $82.3M - so putting this in context a loss of $100M for a bank this size would be a big deal.
Just thought we should recognize the risk of a concentrated geographic loan portfolio.
Have no idea really but I would think banks carry insurance as well, and especially if you are invested in Southern California. Nearly every major investment in today’s world is hedged someway, insurance companies have re-insurance, banks and mortgage lenders have credit default swaps, etc.
Mike
I live in L.A., and I have earthquake insurance. The lenders I have had through the years, did not require earthquake coverage. The coverage itself has a 15% deductible right up front. After that, the insurance company pays for replacement. Most of my friends carry the coverage. I can’t imagine not having it. Not sure how a major quake would affect BOFI. But if my house shook to the ground, I would still be liable for all mortgage payments.
“I would still be liable for all mortgage payments.”
Well not legally, at least I don’t think so - as California is a “non-recourse” state and as such you can walk away from your mortgage and the lender can only take back the property.
An interesting side note is that the portion of the remaining loan that you walk away from, hypothetically, and is taken back by the bank and NOT recovered by the bank when they sell the property in foreclosure is considered a bad debt and you have to declare it as income on both your federal and state tax returns. The bank actually sends this info to the IRS and the state and copies you on a tax form.
I live in CA, earthquake insurance is only available through the State. My home is worth a million give or take, but the cost to rebuild it is around $300,000. So paying the state several thousand a year for a policy with a deductible of 150,000 is not attractive to us.
Until people posted on this board I never heard of ANYONE who had earthquake coverage. Because the deductible is so high. They need to make the deductible relate to the cost of the structure rathe than the price of the house…
I have live through countless earthquakes large and small. And accept that we may suffer a damaging quake. If the insurance were backed by my insurer USAA or had some reasonable deductible I might have it. But I will take the risk of a total loss of structure.
I think you have brought up a couple of good points: do they have coverage, do they have a plan to deal with with business resumption if they are hit in a quake.
I believe earthquake like insurance is much like flood insurance. It is not on standard policies.
Why? Insurance companies can not reliably predict the likelihood of very severe flooding or earthquakes and thus can’t set a price. For instance half of all major flood damages are in areas not in a “100 year” flood zone. Also damage can involve a whole region. Think what Katrina did to insurance reserves for a company with lots of New Orleans policy owners. Earthquakes and I think floods follow a power law- there are lots of them but only a very tiny percentage are bad enough to destroy homes.
I have flood insurance (pay a significant amount extra to a government agency)and earthquake insurance (live not far from the edge of the New Madrid fault ) through my insurance company.
If I were a young person with little home equity and very limited means I would just take my chances. Let the bank have the ruined home back…
I would have mentioned that I am long BOFI, despite their exposure to CA real estate…
What I really think about is the risk to CA (and the US) if Silicon Valley gets hit by a big quake. Although I could see the tech industry fleeing to other states… I try to get my husband to live somewhere less costly often, so far no luck