Earnings fall at 2 mortgage firms but loan standards rise
The easy-money era in home loans to risky borrowers appears to be over, according to financial reports from two Southland lenders Thursday. And that news helped send shares of both higher.
On the surface, there was little to cheer in first-quarter earnings reports from Countrywide Financial Corp. of Calabasas and Pasadena-based IndyMac Bancorp.
Profit fell 37% at Countrywide, the nation’s No. 1 mortgage lender, mainly because of problems with sub-prime loans to customers with shaky credit, heavy debt loads or other financial risks.
Earnings dropped 34% at IndyMac, a Countrywide spinoff that specializes in borrowers a notch above sub-prime who can’t get the cheapest prime loans.
But both companies have tightened their lending standards amid rising delinquencies. Countrywide’s earnings report, in particular, provided details about how the riskiest sorts of sub-prime loans have become all but extinct.
In the last quarter of 2006, one-fourth of Countrywide’s sub-prime borrowers took out a loan or loans for 100% of their homes’ value. In the current quarter, only 3% of the firm’s sub-prime loans will have this zero down payment, Countrywide President David Sambol said.
Late last year, 90% of these zero-down sub-prime loans also had adjustable interest rates -- mortgages that frequently become unaffordable when initial “teaser” rates expire. Countrywide has all but phased out this risky combination, it said.
What’s more, Countrywide has stopped writing second mortgages for borrowers with poor credit, Sambol said, and has cut back drastically on issuing sub-prime loans to first-time home buyers and borrowers who don’t fully document their incomes.
Those types of loans are being supplanted by old-fashioned sub-prime home equity loans, analysts say, with lenders demanding down payments, proof of income and markedly higher interest rates from borrowers whose Fair Isaac Co. (FICO) credit scores leave something to be desired.
“Last year was nirvana for sub-prime borrowers,” said Richard Eckert, an analyst at Roth Capital Partners in Newport Beach.
“In fact, it became easier getting a sub-prime loan approved than a prime loan,” Eckert said. “No verification of assets or employment. FICO scores were irrelevant. And appraisals just had to be in the ballpark.”
For the latest quarter, Countrywide reported profit of $434 million, or 72 cents a share, compared with $684 million, or $1.10, a year earlier. Sub-prime revenue fell by $400 million and the sector knocked 41 cents a share off the firm’s earnings.
Countrywide said sub-prime loans would account for just 4% to 6% of the mortgages it wrote this year, down from last year’s 8%. With most aggressive lenders shrunken or under bankruptcy protection and tougher standards in place, Countrywide said it foresaw the return of a healthy sub-prime business. Its shares rose $1.20, or 3.2%, to $38.92.
IndyMac, whose customers typically don’t qualify for prime loans because they can’t or won’t prove their incomes, recently began requiring higher credit scores, bigger down payments and more documentation of how much money borrowers make.
The company said it earned $52.4 million, or 70 cents a share, down from $79.8 million, or $1.18, in the first quarter of 2006.
Its shares rose $1.01, or 3.3%, to $31.98, after Chief Executive Michael Perry said IndyMac might have reached its earnings “trough,” signaling that the worst could be over.
Rising defaults that have hammered lenders have also threatened to put 1 million or more sub-prime borrowers at risk of foreclosure, advocacy groups say. That trend has sparked calls for national legislation to limit the types of loans offered to hard-luck borrowers.
Countrywide Chairman Angelo R. Mozilo praised Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who has held hearings on the problem. Dodd has indicated a preference for “market-based solutions to some of the issues.”
“A legislative initiative is neither necessary nor appropriate,” Mozilo said, adding that his firm takes “whatever steps are possible” to restructure loans so borrowers won’t lose their homes.
Also Thursday, San Francisco-based Wells Fargo & Co. agreed to pay as much as $6.8 million to California borrowers to settle a lawsuit alleging that its Wells Fargo Financial Inc. arm failed to adequately disclose the fees and penalties contained in its sub-prime mortgages from late 1999 to late 2005.
Wells’ finance company had maintained that its sub-prime lending practices had always been good and were strengthened in recent years.
The Assn. of Community Organizations for Reform Now, an advocacy group for the poor, was a party to the suit filed in San Francisco Superior Court by law firms Cotchett, Pitre & McCarthy of Burlingame, Calif., and Miner, Barnhill & Galland of Madison, Wis.
