The New Year got off to rough start for the employees of Mortgage Lender’s Network (MLN) yesterday, when the Connecticut-based sub-prime lender announced that it was no longer in the business of funding or originating loans.
MLN announced that some 1,440 employees or nearly 80% of its workforce would immediately be placed on "temporary furlough" as the company continues to struggle under the weight of "deteriorating market conditions."
Outside the company’s Rocky Hill, Conn. office, hundreds of teary-eyed employees were seen leaving the complex with nothing but boxes of belongings in their hands.
The news amounted to a stunning reversal of fortune for the privately held multibillion-dollar company. In fact, the company had recently broken ground for a new $100 million Connecticut headquarters and also announced plans for major expansions into the Phoenix, Atlanta, and Philadelphia markets.
Primarily a wholesaler, the company specialized in funding sub-prime loans to the broker end of the business. But the slowdown in the housing market led to a string of defaults and late payments that ultimately forced the lender to cease its wholesale operations, which accounted for about 90% of its loans.
In a press release, CEO Mitchell Heffernan said, "Until we see that credit quality and margins return to acceptable levels we have determined that MLN needs to pause from wholesale broker originations."
This cutback is just the latest sign of trouble in the sub-prime mortgage business.
Last week another sub prime giant, Ownit Mortgage Solutions Inc., filed for Chapter 11 bankruptcy protection. Earlier in the month the company had laid off some 800 employees nationwide when it announced that it was closing its doors immediately and had no money to pay its employees.
The bankruptcy filing revealed that Merrill Lynch & Co., JPMorgan Chase & Co., Credit Suisse First Boston and other mortgage purchasers were demanding that Ownit buy back more than $165 million in loans on which borrowers had missed payments.
But the pain in the industry hardly ends there. Numerous other sub-prime lenders have closed their doors, including Harbourton Mortgage Investment Corporation (HMIC), which ceased operations on December 20.
Like Ownit, Harburton was forced to take action when it was unable to satisfactorily resolve mortgage repurchase claims asserted by investors that had purchased mortgage loans from HMIC.
Even beyond that, numerous sub-prime companies are also reportedly on the auction block, including Irvine-based Option One Mortgage, a unit of H&R Block Inc., and ACC Capital Corp., the private holding company for Ameriquest Mortgage Co. and affiliates.
Sadly, for those still employed in the business it is just a sign of things to come. Issuance of sub-prime mortgage bonds jumped from less than $13 billion in 1995 to $594 billion in 2005, according to analyst Michael Youngblood at Friedman, Billings & Ramsey Inc., with a slight dip to $521 billion expected in 2006.
Given those monumental figures it is only a matter of time before more of these risky loans begin to go into default, forcing their originators to buy them back.
The banking debacle continues.
In your recent articles you say that the new Federal guidelines on non-traditional mortgages (option ARMS and interest-only loans) will worsen the housing market. Can you please explain this further?
In order for prices to continue to appreciate, the housing market is just like any other-it needs a steady stream of buyers to push up prices.
But unlike other markets, in the housing arena a prospective buyer’s purchasing power is only as good as his ability to get a loan. During the rise of the bubble, of course, this was easy. Lenders rushed new programs to the market that gave buyers the purchasing power they needed to drive prices through the roof.
In the aftermath, however, regulators needed to rein in some of the riskiest of these programs in an effort to protect consumers from loans that they can neither afford nor understand.
The result is the new set of nontraditional loan guidelines that Federal regulators have begun to impose on the markets. Under the new rules, lenders will actually have to prove that their buyers can actually afford the loans they make. (What a concept!)
The change that has the most impact is that mortgage lenders now must qualify buyers at the fully indexed mortgage rate assuming a fully amortized payment for interest-only and payment-option loans.
And the difference that makes in purchasing power is huge.
Before these guidelines, borrowers had only to qualify at the start rate, which in some cases was as low as 2%. Now, those same borrowers will need to qualify at rates much higher.
For instance, a borrower who makes 7,000 a month and has $800 in monthly debts will qualify for a maximum loan amount of $433,000 at the 2% start rate, assuming a debt-to-income ratio of 41%. That assumes a payment of $1,600 in principal and interest with a total monthly mortgage amount of $2,100.
Under the new rules, that same borrower would qualify for only $253,000 at the fully indexed rate of roughly 6.5% using the same conditions.
The difference is a whooping $180,000 in lost purchasing power for Option Arm borrowers.
For interest-only borrowers, the difference in purchasing power using the same scenario at 6.5% is a loss of $39,000.
The end result, of course, is that in the future there will be substantially fewer qualified borrowers. On top of that, those who do qualify will do so at much smaller loan amounts.
And for the housing market this can only mean one thing-a continued downtrend.
I hope that helps.
By the way….. Shares of Lennar Corp. tanked yesterday after the homebuilder preannounced that it will post a loss in the fourth quarter on continued weakness in the housing market.
The Miami-based homebuilder now expects a loss of between 88 cents a share and $1.28 a share for the quarter ended Nov. 30.
The bulk of the loss will come from accounting charges totaling as much as $500 million to reduce the balance sheet value of land and options to acquire land. Excluding these charges, Lennar will still fall short of prior forecasts.
The charge to devalue land will be the biggest of all time. A Wachovia analyst said he’d assumed $125 million in land devaluation charges, while Morgan Stanley analyst Robert Stevenson said the charge is twice the size he anticipated.
The bottom in housing is nowhere in sight.
Wishing you happiness, health, and wealth,
Steve Christ, Editor
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at firstname.lastname@example.org.