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Like Lemmings Off a Cliff

Written By Brian Hicks

Posted August 16, 2007

With so many lenders tumbling into the abyss these days, it’s hard not to be reminded of that footage of a whole herd of lemmings jumping off a cliff. (Myth or no myth) I mean how else you can possibly characterize the ruin of so many financial institutions in so little time?

In all, 119 lenders have gone out of business just since last December, and the list grows daily. Now if that’s not a rush into the abyss, I don’t what is.

Even the great Donald Trump has been fired. Trump Mortgage was number 114 on the list.

The latest casualty of their own foolishness is Spectrum Financial Group, an Alt-A and sub-prime wholesaler. Like so many of the rest, they have had to close up shop since the market in the resale arena for their junk loans has dried up completely.

That, by the way, is something of an understatement.

When France’s BNP Paribas SA recently tried to sell about $60 million in bonds backed by U.S. mortgages, it couldn’t find one single buyer.

In fact, among the brokers that it called, "some of them weren’t even answering the phone," according to Alain Papiasse, head of the bank’s asset-management division.

And because the resale market for these loans no longer exists, the loan programs are just simply being discontinued, since the lenders aren’t crazy enough to put them on their own books, either.

Just yesterday one of the nation’s largest Alt-A lenders, Impac Mortgage Holdings Inc., said it has suspended funding on so-called Alt-A loans due to liquidity problems in the mortgage markets–which is something of a little problem if that’s practically all you do.

Alt-A mortgages are offered to more creditworthy borrowers than sub-prime loans, but they often have adjustable rates and sometimes require little or no documentation.

"In light of the continued and widely publicized volatility in the secondary and securitization markets, we have suspended funding on loans previously referred to as Alt-A loans and currently do not have any plans to originate these types of loans in the near future," the company said in a press release.

Not surprisingly, the company also reported a $152.5 million loss for its most recent quarter.

But Spectrum and Impac are hardly alone. Every lender now is pulling up the ladder as fast as it can. It’s kind of startling, actually.

It’s as if the industry were trying to turn back the clock ten years to a time when sound underwriting was the rule, not the exception.

"Every single day, there are lenders putting a freeze on something," says Dana Bain, president of Premiere Mortgage Services Inc., a Sterling, Mass., brokerage focusing on "prime" borrowers. "You’re talking about a huge segment of the market being taken out," he added.


So what’s still left out there? Well, not much.

The only functioning markets right now are in conventional conforming loans (what Freddie Mac and Fannie Mae purchase), and government insured loans–FHA and VA.

Everything else has either been eliminated or is under extreme pressure, particularly Jumbo loans, which are loans greater than $417,000.

That means these days it takes a lot more than the ability to fog a mirror to get a mortgage. In fact, even borrowers with good credit are being turned down.

"We thought the dust was going to settle, but instead, it just blew up," says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. "Everyone is being affected."

And that, my friends, is the essence of the credit crunch, and no amount of Fed cuts can possibly change it.

Ben Bernanke, unfortunately, couldn’t save housing if he wanted to.

In other words, expect the lemmings to keep piling up . . . and that’s no myth.

By the Way: According to the figures released yesterday by the National Association of Realtors (NAR), sales of existing homes fell in 41 states during the April-June quarter. Moreover, home prices also fell in one third of the metropolitan areas surveyed. That amounted to the worst downturn in 16 years.

The states suffering the biggest drop in year over year sales were Florida, down 41.3 percent, and Nevada, down 37.5 percent. Other states with big declines were Arizona, down 23.4 percent; Tennessee, down 21.5 percent; Maryland, down 21.1 percent; and California, down 19.8 percent.

But, true to form, the NAR still insisted that there was really nothing to see here.

Lawrence Yun, the group’s new senior economist, said in regard to the numbers, "Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets."

Clearly, huh?

Baghdad Bob would be proud.

The bottom in housing is nowhere in sight, no matter what your realtor says.

Wishing you happiness, health, and wealth,

Steve Christ, Editor

P.S. In the time it took me to write this article, another lender, Pacific American Mortgage, bit the dust. That makes number 120. At their height they originated over $75 million dollars in ALT-A loans.

P.S.S. I’ll be speaking in depth on the state of the housing market at the Angel Research "Profit From the Peak" Summit in Philadelphia next month. It’s still not too late to sign up. It promises to be a profitable experience. You can learn more about it here.