Nearly all of the mortgage lenders who engaged in the riskiest underwriting practices during the housing boom have gone bankrupt, been sold, or curtailed their operations. But Wall Street investors may stay wary of private mortgage-backed securities until home prices stabilize, a new study suggests.

A study of 163 of the largest U.S. lenders by SMR Research Corp. determined that all but three of the 28 companies that scored the highest on six measures of credit risk have already closed their doors or have problems that are well-known.

Only two of the nation’s top 10 lenders — Countrywide Financial Corp. and HSBC — scored higher than the national average risk score of 1,000.

But investors remain hesitant to provide short-term funding to mortgage lenders or buy securities backed by some types of mortgage loans on the secondary market, suggesting the liquidity crunch won’t end until home prices stabilize and investors regain confidence, said Stuart Feldstein, president of Hackettstown, N.J.-based SMR Research.

“The only thing I can think of that would cause this to calm down is a Federal Reserve rate cut,” Feldstein said, which would provide liquidity to financial markets and indirectly stimulate more affordable loans and firm housing prices.

The alternative, Feldstein said, could be a recession, fueled by the scarcity of jumbo loans in California and other high-cost areas.

“I don’t think foreclosures will ebb until home prices start to firm,” Feldstein told Inman News. “The big threat as of a week or two ago is in California, where investors are walking away from (financing) jumbo loans.”

Many homes in high-cost areas require jumbo loans that exceed the $417,000 conforming loan limit for most loans purchased and guaranteed by Fannie Mae and Freddie Mac.

With jumbo lenders such as Thornburg Mortgage Inc. having difficulty obtaining money to make loans, “there is a serious threat to home prices and home sales in California, and since California represents 20 percent of the value of the entire U.S. housing stock, this is a very serious matter,” Feldstein said.

The question, he said, is whether the banks, thrifts and credit unions that can use depositors’ money to fund mortgages “have the capacity or the desire to make all these jumbo loans.” If not, “We could be on the cusp of a larger crisis, even though ironically, the outfits that started it are gone.”

Feldstein’s firm, SMR Research, analyzed reports lenders file with federal regulators under the Home Mortgage Disclosure Act (HMDA), and county courthouse lien records covering most U.S. homeowners. The study looked at six credit risk criteria: combined loan-to-value (CLTV); percentage of total loans provided to subprime borrowers; percentage of loans to borrowers without verified incomes; lender’s reliance on piggyback loans; the percentage of loans with adjustable rates; and the percentage of loans with low introductory teaser rates, such as pay-option loans.

“Our view all along has been that the losses on these securities due to foreclosures have been caused more by high CLTV lending, as opposed to subprime credit history,” Feldstein said. “As it turns out, the same companies were doing most of both.”

All but three of the 28 lenders who scored above 1,750 have closed or are experiencing credit quality problems that are well-known to investors and the public, Feldstein said. Those who scored 1,300 to 1,750 have had “mixed results.” Companies that scored above the national average of 1,000 but less than 1,300 — such as Countrywide — may face difficulties, but more because of the liquidity crunch than their own underwriting practices, Feldstein said.

“I think Countrywide’s main problem is liquidity, and the degree of panic among private investors,” Feldstein said. “Countrywide is still fully capable of originating loans and selling them to Fannie and Freddie.”

However, nonagency loans had become such a significant part of Countrywide’s business that it’s been forced to retrench as investors became wary of providing funding for such loans, Feldstein said.

In the meantime, the Bush administration has resisted calls from the industry and some lawmakers to raise the conforming loan limit and allow Fannie and Freddie to provide liquidity for at least part of the jumbo-loan market.

Fannie and Freddie are also operating with restrictions on their loan portfolios, which were capped at about $1.4 trillion in the wake of accounting and management scandals.

“It’s unfortunate that Fannie and Freddie’s accounting scandals created so much ill will on Capitol Hill, because that makes it more unlikely that Congress will be willing to let them delve into this,” Feldstein said.

The National Association of Realtors projects the Federal Reserve will cut the federal funds rate twice this year, to 4.75 percent, beginning in October.

“I think it depends on what happens in secondary markets,” Feldstein said. “If investors continue to shy away from jumbo mortgage securities, Fed action can’t come soon enough. Otherwise, falling home prices will get worse, and foreclosure will rise.

“You would expect a continued collapse in home sales to cause a recession, and the Fed is supposed to do something about that kind of thing before it happens.”

If, on the other hand, investors return to the market for securities backed by jumbo loans, “Maybe the Fed has a little more time to play its hand,” Feldstein said.

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