I also believe that Newcastle will get back the billion dollars they claim because the loans are older, written on properties that have likely appreciated greatly, and were underwritten during very different market conditions.

The problem for the stock value is that NCT makes its money by selling its loans, profiting from the interest rate spreads and the transaction fees. It then uses the recaptured funds to write new loans. Since the CMBS resale market has dried up NCT has no market for newly originated loans.

This means that when they lend out the returning billion dollars, NCT will likely have to keep the loans until such time as the CMBS resale market returns. This results in a loss of revenue from the spreads on the loan sales, and less total transactions, thus reducing fee income. Newcastle Investment is externally managed by Fortress Investment Group, which owns about 9% of the REIT. The same group now embroiled in a battle with real estate tycoon Harry Macklowe to forclose on the GM Building in New York along with other assets.

Since the stock price is based largely on anticipated future earnings and these may be reduced in the near term, investors are not willing to pay what they were in the past for the stock. Unless Newcastle finds partners to bring in additional capital, or the CMBS market returns, its lower income will mean less cash to distribute in the form of dividends reducing the current yield.

I do not fear the loan risk as some might, I just think earnings will be down for a while. However, as I have stated before, even if they were cut in half, or more, the reduced dividend yield would still be very rewarding, making Newcastle worth considering as part of a diversified portfolio.