A Mini-Mortgage Company Turnaround On Wall Street

Is a Wall Street resurgence in the works for mortgage lenders?

Fremont General Corp. and NovaStar Financial Inc. led home loan lender shares higher for the second day in a row Wednesday, buoyed by a report showing an increase in home loan refinancing.

The Mortgage Bankers Association said mortgage applications rose last week to the highest level in almost three months, paced by a 15 percent surge in refinancings.

The perceived risk of owning low-rated subprime mortgage bonds held steady after declining for four consecutive days.

Fremont, a California mortgage lender, told its employees that five or six prospective buyers are in talks to buy its residential mortgage business - news that also helped push the stock price upward.

“The market has been chaotic, but we think it has been overdone,” said David Hendler, an analyst at CreditSights Inc. in New York.

“People kind of sell and ask questions later.”

The shares of bad credit home loan companies, which tend to lend to the riskiest borrowers, led by New Century, plummeted Monday as concerns mounted that rising default rates would push them into bankruptcy.

More than two dozen bad credit mortgage companies have already gone out of business, ceased operations or sought buyers since the start of 2006.

Subprime borrowers, typically people with poor credit or heavy debt loads, pay 2-3 percent more for a mortgage than less risky customers.

Moreover, many such loans are made at adjustable rates, leaving them prone to default if borrowing costs rise or lenders tighten standards.

Subprime lenders are backed by financing from larger banks and securities firms. Some of those stocks are smart buys now because the concerns that they’ll be hurt by subprime defaults are overblown, analysts say.

“The market has already fully punished [these stocks] for their involvement in subprime,” the analysts wrote.

New Century disclosed Friday that it faces a criminal probe and might need waivers from its own lenders to stay in business. On the same day, Fremont said it would stop issuing home loans to people who can’t pay and announced plans to get out of the subprime lending business.

As home sales slowed, lenders loosened approval standards to keep business flowing. The mortgage market hasn’t contracted enough to force out all the companies who relaxed too much, however, cautions Eric Sieracki, CFO of Countrywide Mortgage.

“If we’re fortunate, we get rid of the excess capacity and everybody lives profitably ever after,” he said, adding that he doesn’t see rising subprime defaults as a precursor of similar problems with prime rate loans.

“Let’s face it. No offense to the subprime consumer, but they haven’t seen fit to focus on their credit and maintain a great credit record.”

Shares of Countrywide, the nation’s biggest mortgage company, have dropped 12.5 percent this year, a sell-off that’s been “overdone,” according to Piper Jaffray Inc. analyst Robert Napoli.

Only 9 percent - a small number - of all Countrywide mortgage originations have qualified as non-prime, he said in a report to clients Wednesday.

SOURCE: Chicago Tribune