Mortgage Lenders Reduce Dividends
Two Southland mortgage lenders slashed their stock dividend payments Tuesday, another sign of the squeeze on industry profits fueled by rising short-term interest rates, intense competition and worries about loan quality.
Impac Mortgage Holdings Inc. of Newport Beach cut its quarterly dividend from 75 cents a share to 45 cents, citing reduced earnings expectations in the current quarter.
Irvine-based ECC Capital Corp. also lowered its quarterly dividend, from 22 cents a share to 18 cents.
Both companies originate and invest in home loans for borrowers whose creditworthiness is considered less than prime.
The mortgage business in general has been under pressure this year as the Federal Reserve has continued to tighten credit, boosting lenders’ cost of money.
At the same time, heavy competition among lenders has kept a lid on mortgage rates -- particularly for adjustable-rate and other so-called alternative loans that have been increasingly popular in California and other states with high home prices.
That segment of the business also has been hurt recently by growing concerns that many less-than-prime borrowers have overstretched to buy homes and could have trouble making payments when their loan rates are adjusted in the next few years.
Wall Street, which buys mortgages from lenders via the mortgage-backed securities market, has effectively lowered the prices it is willing to pay for certain alternative loans, analysts say. That has further squeezed lenders’ profit margins.
“It has gone from a seller’s market to a buyer’s market,” Mark Agah, an analyst at investment research firm Portales Partners in New York, said of the mortgage-backed securities market.
On Friday, Irvine-based New Century Financial Corp., a major player in sub-prime loans, slashed its 2005 earnings outlook, in part because of what it called a “significant deterioration” in the resale market for mortgages.
“The trends are certainly against all of these companies in terms of maintaining current profitability,” said Jim Fowler, a managing director at investment research firm JMP Securities in San Francisco.
Impac, ECC and New Century are real estate investment trusts. That means they have to rely on short-term borrowings to fund their lending. By contrast, banks and thrifts often benefit from having low-cost consumer deposits to fund their loans.
Impac warned investors in June that the company might be forced to cut its dividend. Its stock, which traded at $21.55 a share just before the June warning, closed at $12.07 on Tuesday, down 12 cents. The dividend announcement was made after markets closed.
ECC Capital reported its dividend cut at the opening of trading Tuesday. Its shares slid 27 cents, or 7.5%, to a record low of $3.33. The company went public in February, when it sold 57 million shares at $6.75 each.
Impac Chief Executive Joseph Tomkinson said he expected the firm’s earnings to improve “once the Federal Reserve changes or modifies their stance on increasing short-term rates.”
At ECC Capital, co-Chief Executive Shabi Asghar said the company was “focused on managing our business conservatively and preserving our flexibility with respect to capital.”
Many analysts have warned that, once the housing market slows, a shakeout is inevitable in the mortgage business because too many players will be competing for a shrinking pie.
