Sub-prime loan market shaken up
There’s more trouble in the mortgage lending market -- and that could mean problems for higher-risk borrowers who want to refinance their home loans.
An independent Orange County lender and Europe’s largest bank both spooked Wall Street on Thursday by reporting huge losses on “sub-prime” mortgages to borrowers with bad credit, high debt loads or other risk factors.
The bad news from Irvine’s New Century Financial Corp. and London’s HSBC Holdings sent shares of sub-prime lenders tumbling by double digits, with New Century down 36%. The disclosures shaved smaller amounts off the stock price of HSBC and other lenders with broader operations.
The shakeout in the sub-prime industry began last year as housing prices leveled off and interest rates rose, curbing demand for loans. At first, some companies loosened lending standards to keep loan volume high, a tactic that has produced a wave of early loan defaults. More recently, companies such as New Century have tightened their loan policies to reduce their exposure to mortgages that could go sour.
As part of the fallout, marginal borrowers who snapped up loans with initial easy-money terms in 2004 and 2005 will find it impossible to refinance this year to avoid sharply higher payments, especially with home prices flat or lower in many areas, industry analyst Zach Gast said.
As much as $800 billion of adjustable-rate mortgages will reset to higher payments this year, and 1 of 11 home loans is both adjustable and sub-prime, according to the Mortgage Bankers Assn.
“There could be a good chunk of borrowers with nowhere to go to get loans,” said Gast, who follows the industry for the Center for Financial Research and Analysis, a Rockville, Md., forensic accounting and due diligence firm with mutual funds, hedge funds and insurers as clients.
“It means a lot of people are going to lose their homes.”
Gast said investors in mortgage-backed bonds, who for years demonstrated an unquenchable demand, had begun backing away from securities created from the riskiest pools of loans.
HSBC, which bought U.S. sub-prime lender Household International Inc. for $15.5 billion in 2003, said it would raise its provisions for bad loans by $10.5 billion, 20% more than analysts had expected. The action was taken mainly because adjustable sub-prime loans are driving delinquencies higher, Chief Executive Michael Geoghegan said in a conference call.
HSBC’s New York-listed shares fell $2.44, or 2.6%, to $89.78. Washington Mutual Inc., Countrywide Financial Corp. and Wells Fargo & Co., all of which write sub-prime mortgages as well as conventional loans, saw their stocks slip by about 1% to 3%.
New Century is the second-largest sub-prime mortgage originator after San Francisco-based Wells Fargo, with HSBC just behind in the No. 3 slot. The Irvine company said late Wednesday that it had greatly underestimated the losses it would record as a result of loan buyers forcing it to repurchase mortgages that had quickly fallen into default.
It said it would record a loss of undetermined size for the fourth quarter, rather than the $1.08-per-share earnings Wall Street was expecting. New Century also said it would revise downward its financial results for the first nine months of last year.
New Century shares plummeted $10.92 on Thursday to $19.24, their lowest price in nearly four years. It was the sharpest decline for the stock since late 1998, when many sub-prime lenders were forced out of business by credit fears sparked by Russia’s default on its debt.
Investors also dumped sub-prime specialists Novastar Financial Inc. of Kansas City, Mo., down $2.29, or 11%, at $18.31. Accredited Home Lenders Holding Co. of San Diego also tumbled as much as 11% during the day before closing down $1.75 at $27.25, a 6% decline.
Analyst Richard Eckert of Roth Capital Partners in Newport Beach had upgraded New Century to a “buy” in November because its shares looked cheap and Eckert had confidence in management.
Now, he said, the confidence factor among investors and analysts was “close to zero.”
In a recorded message to analysts, New Century Chief Executive Brad Morrice sought to allay fears of a cash crunch at his company, noting that New Century “had cash and liquidity in excess of $350 million” at year-end. Company executives declined to elaborate on those comments.
Analyst Gast said New Century’s cash and liquid assets were proportionally less than half of those at competitors such as Accredited Lending, with the $350 million in cash and liquidity at year-end down more than 20% from the $457.1 million that New Century reported three months earlier.
New Century is far from the first casualty in the sub-prime shakeout. Victims have included Ownit Mortgage Solutions Inc. in Agoura Hills, which filed for bankruptcy protection last month. Ownit had closed down after loan buyers on Wall Street demanded that it repurchase newer loans that had gone sour.
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