Shakedown in the Mortgage Industry
There’s a lot going on in the sub-prime mortgage industry, and it’s not all good. Rising interest rates, increasing home prices, decreasing customer bases, defaulting customers, slowing housing sales, and soaring competition have forced most companies to either cut back operations, close shop or sell out to larger brokerage firms like Morgan Stanley, Barclays Plc and Deutsche Bank AG. Recent events that prove this:
- Mortgage Lenders Network USA Inc. (MLN), the 15th-largest issuer of sub-prime mortgages with $3.3 billion loans in Q3 2006, announced that it was temporarily not going to issue new loans through its wholesale unit.
- Ownit Mortgage Solutions Inc., the 11th-largest issuer in the market, filed for bankruptcy last week at the U.S. Bankruptcy Court of San Fernando Valley, California, with debts totaling more than $100 million.
- Sebring Capital Partners LP cut back on its staff in 2006, and subsequently closed down in December.
- Saxon Capital Inc. sold out to Morgan Stanley for $706 million last month; the latter is planning to cut 170 jobs.
- The year 2006 ended with the sale of First Franklin, National City Corporation’s sub-prime lending and servicing unit, to Merrill Lynch & Co. for $1.3 billion. The financial management company also acquired associated units, the National City Home Loan Services based in Pittsburgh, and NationPoint, headquartered in California.
The larger brokerage firms who are snapping up the smaller sub-prime lenders and servicing units are protecting themselves and spreading risks of default by packaging home loans into larger securities and selling them to clients who want interest income.
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