Upbeat housing data this week coupled with a renewed fighting spirit among survivors of this year’s subprime saga may signal an unexpected spring comeback for the beleaguered sector.
With as many as 20 percent of subprime lenders gone, or going, out of business in 2007, and resulting originations expected to slide up to $250 billion this year, the picture would seem weak-to-bleak for lending to borrowers with FICO scores below the prime threshold of 620.
Industry leaders, however, are beginning to coalesce around a positive theme, calling the slowdown in subprime a “correction” that serves to weed out lenders who fail to use caution when writing loans for the riskiest borrowers.
Supporting that upbeat assessment is news this week from the National Association of Realtors that pending sales of existing homes increased at a seasonally adjusted annual rate of 0.7 percent to 109.3 in February, from a reading of 108.5 in January. That’s 8.5 percent below the level of a year earlier, but stronger than the market had been expecting.
“If our company can get through April and have the month we think we’ll have, it’ll solve our ills,” says one veteran subprime lender, who did not speak for attribution, but was willing to point fingers where few have before. And, one big target is the secondary market. “Wall Street has been squeezing us on premium for the past year,” the person says heatedly, referring to slim profits offered by investors in subprime paper.
That, coupled with the market’s hair-trigger reaction to early payment defaults that have been spreading throughout the subprime loan sector, has forced many lenders there to sharply pare back operations, if not shut down entirely. About 30 have discontinued business in the last six months.
Outspoken, this particular lender sees nefarious intentions behind the trend. “The EPD [buyback] claims and reduced premiums were intended to destabilize lenders’ platforms so Wall Street could [acquire] some of these companies for a song. They’ve taken over every [lending] platform they want,” this person said, adding that a year ago it was apparent that subprime lenders “were in Wall Street’s crosshairs.”
Better collateral will find willing market
A different view comes from Peter DeMartino, managing director, Greenwich Capital, Greenwich, Conn., who says “every five years, there’s a major [change]. The market has survived [each one] and gone on to thrive and grow. Some lenders have lived through it, [so they know] it’s doable.”
Products need to be underwritten better, he says, and, when that happens, “those lenders who can produce better collateral will find a willing market.”
But at what price? asks the unnamed lender, who reports that “today, we’re only getting premiums of 102,” referring to 2 percent of the loan amount taken by originators selling mortgages to investors. “Last year 103 to 104 was the norm, not the exception.”
Another prominent subprime lender on the West Coast, also bending under current pressure to fund loans and find buyers, says Wall Street is “just an intermediary,” standing between originators and the bond buyers who ultimately provide financing.
Indeed, he says, “Wall Street is at the mercy of themselves right now,” as they search vainly to sell their pools to pension funds, foreign banks and others. “There’s no problem selling AAA bonds, but anything below AA is going into hedge funds. There are few buyers” for the lower-credit-spectrum bonds, he laments.
At issue, he says, is the back end. “There are a lot of servicing and collection problems,” an apparent reference to the rising defaults and delinquencies plaguing subprime loans, especially of recent vintage.
In any event, he, too, is looking at mid-May for some end to the current carnage.