NEW YORK (Reuters) - A crisis among lenders that specialize in so-called subprime mortgages is likely to strengthen the hand of traditional banks as borrowers across the spectrum turn to a more stable source of home financing.
A slump in the stocks of lenders such as New Century Financial Corp., and bankruptcy filings by others has put borrowers on edge. The shakeout in the subprime sector has left borrowers with fewer choices.
More than two dozen subprime lenders have exited the business in the past year as loan defaults and delinquencies have risen along with interest rates. The turmoil has pushed borrowers to banks they view as stable and least likely to trip up the closings on their house purchases.
JPMorgan Chase & Co. and other banks have enjoyed a spurt of new business since February. In part, the shift reflects a one-fifth reduction in the number of subprime lenders since late 2006.
“We’ve seen volume increase across our spectrum,” including prime loans, said Tom Kelly, a Chicago-based spokesman for JPMorgan’s Chase Home Lending. “There’s a flight to quality. If you’re a consumer and you know there is news in the mortgage world but can’t really focus on it, you’ll do business with bigger, well-known firms that will be around.”
Maintaining a presence in subprime lending through difficult times is evidence for the view that credit-challenged borrowers will always represent a large chunk of the U.S. mortgage market.
Subprime lending may still represent $450 to $500 billion in annual volume in coming years, even after the 30 percent drop from 2005 and 2006 levels forecast by some Wall Street investment banks.
The loss of lending capacity from more than two dozen subprime companies since late 2006 has mostly offset lower demand in a stagnating housing market, analysts said.
So Chase and other lenders are happily filling voids left by New Century and Fremont General Corp.’s Fremont Investment and Loan, which together made about $84 billion of the $640 billion subprime mortgages last year.
Mortgage brokers are also reassessing alliances. In one example, Americana Mortgage Group’s brokers are increasingly sending business to larger companies including Chase and Wells Fargo & Co. after the failure of Mortgage Lenders Network USA fouled a loan in process.
“I’m trying to stay with more reputable and largest financial institutions so I don’t get the rug pulled from underneath me,” said Bob Moulton, president of Americana in Manhasset, New York. Any disruption to loan processing “is not good for referrals,” he said.
Chase Home Finance ranked 17th in subprime originations in 2006 with $11.6 billion in volume, according to UBS Securities, citing trade publication Inside B&C Lending. Wells Fargo was ninth, with $27.9 billion.
Another broker said Washington Mutual Inc.’s Long Beach Mortgage subprime unit was grabbing a larger slice of subprime business. First Franklin Mortgage may also get a boost thanks to Fremont General, which last week was urging account executives to send business to the subprime unit of Merrill Lynch & Co..
Spokesmen for Wells Fargo, Washington Mutual and Merrill Lynch declined to comment. Chase’s Kelly didn’t quantify the increase in lending.
“People are looking for those companies with stability and capital and staying power,” said an executive at a leading U.S. lender who spoke on condition of anonymity. “Even in Alt-A, we’ve seen a flight to quality. Brokers have been burned a few times now and they want to make sure a loan closes.”
Alt-A loans are loans whose quality is seen stronger than subprime but below the credit status of prime because borrowers often lack proof of income or other documentation.
Angelo Mozilo, chief executive officer at Countrywide Financial Corp., the biggest U.S. mortgage lender, in a CNBC interview said market overreactions to subprime woes is akin to “throwing the baby out with the bathwater” and hurting efforts to boost homeownership.
“There is a real rush to judgment in cutting off the programs (first-time homebuyers) use,” he said.
Meantime, mortgage lenders are still facing perhaps the sharpest rise in delinquencies in the history of subprime loans, putting them at risk of losses on new loan generation.
Prices on subprime loans remain depressed even as lenders cut off the riskiest borrowers by demanding at least a 5.0 percent downpayment and proof of income.
Subprime loans delinquent more than 60 days as of December surged to nearly 10 percent of the total, up from 5.0 percent two years earlier, according to JPMorgan data.
At WaMu, Chief Executive Kerry Killinger in January said the company voluntarily cut subprime production after a $122 million fourth-quarter loss at its mortgage unit. JPMorgan Chairman Jamie Dimon has said the bank cut back on subprime lending as mortgage banking profit fell, but pledged to emerge a stronger competitor.
The problem for lenders is that subprime loans they make are still worth less than the cost to produce, UBS Securities analysts said in a client note on Tuesday. Companies are taking losses of about $3.50 per $100 originated based on the price of $98.50 for a “clean” pool of mortgages, they said.
Running a subprime business is unprofitable, and “will remain so for the near future,” UBS wrote. Lenders will be eroding capital for months to come, they said.
Tighter lending standards across the board in subprime mortgages will cut annual new-home purchases by 200,000 units, softening U.S. housing and mortgage originations more, according to Goldman Sachs Group Inc. economists.
“The easy days of originating loans with heavy volumes are gone,” said Mike Johnston, president of Proficio Mortgage Ventures in Jacksonville, Florida. But lenders such as NetBank “just closed their doors” on subprime offices in Jacksonville, reducing competition, he said.
“GMAC’s Ditech ... you’ll see them pick up a lot of business,” he said.
“Eventually, the business will again be profitable,” UBS analysts said. “Fewer loans will get made. Volume will be down a minimum of 30 percent, maybe more. Loans that will be made will be of higher quality.”