Another California Mortgage Loan Provider Hurt By Backfiring Subprime Loans
The San Diego Union-Tribune reports that Accredited Home Lenders, a home loan lender based in the city, posted hefty fourth-quarter losses as the housing downturn continued to take a toll on lenders who specialize in mortgages for borrowers with bad credit.
Accredited, the nation’s 11th-largest bad credit mortgage lender, lost a stunning $37.8 million for the quarter, or $1.49 per share. That after a $43.2 million profit a year earlier.
Revenue dropped 60 percent for the quarter to $59 million as the mortgage company boosted its credit standards for borrowers and consequently lost business to competitors.
For the year, the company reported net income of $57.7 million, or $2.48 a share, down from $155 million, or $7.37 a share, in 2005.
This reversal of fortune is not limited to Accredited.
The entire subprime lending industry has been trampled as more borrowers default on their loans and investors who buy mortgages become wary of purchasing bad credit loans. Last year, at least three bad credit mortgage lenders fell into bankruptcy reorganization.
Others have slashed their work forces. Last week, European banking giant HSBC, a big player in the U.S. subprime market, warned that it needs to set aside nearly $10.6 billion to cover loans that it expects won’t be repaid.
New Century Financial of Irvine, the nation’s second-largest bad credit home loan provider, also warned investors that its loan portfolio was losing value as more borrowers missed payments.
Accredited has responded to the industry downturn by tightening standards for borrowers and boosting reserves for bad credit home loans. Investors who purchase these loans in the secondary market require originators to buy them back if borrowers default.
“We have been making adjustments to the products we offer as well as to the processes and underwriting discipline,” said Joseph Lydon, Accredited President and COO. “We recognize the market we’re in, and we believe credit quality has to be the No. 1 priority.”
The question for the housing industry is whether the troubles in subprime lending will spill over into more conforming mortgage products.
If they do, mortgage lenders could tighten credit standards for borrowers – requiring larger down payments, better credit or more income before they can qualify for loans.
And that could hurt not only first-time buyers but also people who recently purchased homes using hybrid adjustable rate home loans with the idea of refinancing.
Hybrid ARMS offer a low teaser rate for a certain time – usually two or five years. Then the loans reset into full-fledged adjustable mortgages. The result often is a significant jump in monthly payments for borrowers.
With little or no price appreciation in the past year, it may prove hard for these borrowers the option of a mortgage refinancing out of loans if lenders boost credit standards.
For now, however, the problems in the mortgage business have been limited to the riskiest borrowers in the subprime industry, according to analysts.
“I don’t foresee it spreading throughout the mortgage sector or the consumer credit sector as a whole,” said Robert Napoli, an analyst with Piper Jaffray who follows Accredited.
“There are only so many people in that market, said Lou Galuppo, director of residential real estate at the University of San Diego’s Burnham-Moores Center for Real Estate. “The only way to enlarge the market is to drop the (credit) score.”
Today, more borrowers are missing payments on their loans or going into foreclosure. California mortgage defaults reached their highest levels in eight years during the fourth quarter.
SOURCE: San Diego Union-Tribune