Tuesday, January 2, 2007

Third Sub-Prime Mortgage Lender Stops Making Loans

From Bloomberg

Mortgage Lenders Network USA Inc. became the third company in a month to stop issuing loans as U.S. housing sales slowed and defaults by borrowers rose.

The company, known as MLN, is ``not currently funding loans or accepting new applications,'' according to a statement on its Web site. Middletown, Connecticut-based MLN, which caters to borrowers with low credit scores, said it is ``exploring strategic alternatives'' for its wholesale unit, which typically means a company is seeking new backers or a buyer. MLN also handles billing and collections for $15.6 billion of loans.

Lenders including Ownit Mortgage Solutions Inc. and Sebring Capital Partners LP that specialize in ``sub-prime'' mortgages closed operations and cut staff in 2006 as more loans to high- risk customers soured. Nationwide, late payments on sub-prime loans rose during the third quarter to 12.56 percent of the total, the most since the first quarter of 2003, the U.S. Mortgage Bankers Association said.


This is not good news for the housing market. The last few years have seen a large increase in "sub-prime" mortgage lending. These loans are already performing poorly. More importantly, they are doing poorly earlier in the mortgage's life. This leads to what brought Ownit Mortgage down. They sold their sub-prime mortgage loans to banks and broker dealers, who in turn packaged the loans into larger pools. However these sales had a caveat that if the loan performed poorly, the purchaser could sell the loan back to Ownit mortgage. Ownit was flooded with these buyback situations, which forced them to close their doors.

The rate of sub-prime delinquencies has risen over the last few years:

Across the industry, the percent of subprime mortgages in default rose to 7.74 percent in August, up from 5.53 percent in August 2005, said analysts at Friedman Billings Ramsey Inc., who follow the securitized portion of the market.



Ownit recently filed for bankrupcy

While not all mortgage companies have filed for bankruptcy or shut their doors, we have seen an increase in lay-offs:

Ownit joins Ameriquest Mortgage Co., Countrywide Financial Corp., H&R Block Inc.'s Option One, BNC Mortgage Inc. and other lenders in shutting operations or laying off employees as the U.S. housing market slows. Delinquencies are rising, home prices are falling and borrowers of adjustable-rate mortgages are facing higher monthly payments.


If this pace of activity keeps up, the sub-prime market will be in tatters pretty quickly.