Some economists say that the tightening of credit following a real estate boom can have a bigger impact on home prices than loan defaults and foreclosures. With that in mind, observers may be getting shivers as they look back to see where the lenders that were at the top of the subprime lending heap are today.
(See Inman News‘ four-part series on the Subprime Tsunami this week. Part 1, “Subprime tsunami threatens to extend housing downturn,” appears in today’s edition of Inman News.)
The following “top 10” chart was put together last year in a report by the California Reinvestment Coalition, which analyzed federal Home Mortgage Disclosure Act data. These were the top 10 “higher-cost” lenders in California in 2005, plus the number of loans they made exceeding by 3 percent or more the rate for Treasury securities of comparable maturity (Not exactly the same thing as subprime, but these are all subprime lenders).
Top Higher-Cost Lenders in California 2005:
1. New Century Mortgage (52,270)
2. ACC Capital/Ameriquest (50,238)
3. General Electric/WMC Mortgage (46,755)
4. Washington Mutual/Long Beach Mortgage (38,804)
5. National City/First Franklin (Merrill Lynch) (29,871)
6. Fremont Investment & Loan (29,625)
7. Lehman Brothers (including BNC Mortgage) (29,129)
8. Countrywide (28,372)
9. H&R Block/Option One Mortgage Corp. (20,827)
10. Encore Credit Corp (Bear Stearns) (19,521)
With New Century, Fremont Investment & Loan and WMC mortgage all making headlines last week, Inman News checked out what’s going on with every lender on this list. The results:
1. New Century has stopped funding loans and analysts who follow the company expect it will declare bankruptcy.
2. ACC Capital was ahead of the curve, announcing in May that it was closing its Ameriquest and Town & Country branch offices and laying off 3,800 employees.
3. WMC Mortgage laid off 460 employees Thursday — 20 percent of its workforce — and has stopped making zero-down loans or loans to borrowers with FICO scores below 600.
4. Washington Mutual went from making $1.03 billion in profits in mortgage lending in 2005 to losing $48 million in 2006. The bank cut more than 10,000 jobs last year, sold nearly all of its subprime mortgage production, and scaled back subprime originations significantly.
5. National City was able to complete the sale of First Franklin Financial Corp., its subprime lending subsidiary, to Merrill Lynch & Co. on Dec. 30, but was still trying to sell more than $7 billion in First Franklin loans still on its books. First Franklin and its more than 2,000 employees are still originating loans, and can count on Merrill Lynch to securitize them.
6. Fremont Investment & Loan’s parent company, Fremont General, is trying to unload the bank and get out of subprime lending. But the process is being complicated by a cease-and-desist order the FDIC issued this week against Fremont I&L. Fremont I&L cut ties to 8,000 mortgage brokers after early payment defaults rose to 6 percent, and had the highest rate of defaults on subprime loans in 2006, according to UBS.
7. Lehman Brothers and its mortgage originators — including BNC Mortgage, Finance America, and Lehman Brothers Bank — have stayed out of the headlines. With its deep pockets (it owns three banks) and position as one of the biggest securitizers of loans — in 2006, the company packaged and sold as investment securities $146 billion in home loans — Lehman can presumably keep its originator’s lines of credit open.
8. Countrywide Financial saw the delinquency rate on its subprime loans hit 19 percent by the end of 2006, up from 15.2 percent at the end of 2005 and 11.3 percent at the end of 2004. But Countrywide has already scaled back on subprime lending — 83 percent of its $1.06 trillion servicing portfolio is conventional mortgages — and expects to emerge from the subprime tsunami with higher profit margins and fewer competitors.
9. H&R block closed 12 branches of its Option One Mortgage subprime lending subsidiary in November and has been trying to sell the company ever since. There have been no takers, leading to some speculation over whether H&R Block can pull off the sale of what it says is the nation’s fifth-largest originator of subprime loans ($40 billion in 2006).
10. Bear Stearns last month went from lending Encore Credit Corp. money to owning the subprime lender. The $26 million purchase price was credited against debts to Bear Stearns. ECC Capital’s loans had performed well compared to those of other originators, Bear Stearns said when it announced the deal in October.
The situation with subprime lenders raises an important question over where all the Californians with adjustable-rate mortgage loans scheduled to reset this year will go for a refinance if most of these lenders are gone or are no longer making subprime loans.
To weigh in on the debate, visit the discussion at the Inman News Blog and leave a comment.