Brutal competition in the shrinking home loan market has caused “irresponsible players” such as Ameriquest Capital Corp. and New Century Financial Corp. to spoil mortgage banking profits, the chairman of No. 1 home lender Countrywide Financial Corp. said Tuesday.
Announcing earnings that disappointed Wall Street, Countrywide founder Angelo R. Mozilo singled out the two Orange County-based competitors, blaming “the Ameriquests and New Centuries of the world” for pricing loans too low in a bid to retain market share as business slows.
“I’ve been doing this for 53 years, and I’ve never seen that situation sustained,” Mozilo, 67, said during a conference call with securities analysts. “Eventually they gag on it.”
Mozilo added that “cracks in the armor” were beginning to appear, citing Ameriquest’s recent decision to lay off 10% of its staff, or 1,500 people, at its Ameriquest Mortgage unit. On Tuesday, another Ameriquest company, Argent Mortgage Co., said it would shed 640 of its 4,000 employees, with layoffs spread across its California headquarters and regional centers in Illinois and New York.
Privately held Ameriquest Capital declined to respond to Mozilo. Last week, Ameriquest Mortgage agreed to pay $325 million to settle allegations of lending abuses brought by 49 states and the District of Columbia.
New Century, a public company that will release its earnings Thursday, issued a statement saying that it had been “responsibly raising rates in order to restore our profit margins to acceptable levels.”
Orange-based Ameriquest Capital and Irvine-based New Century are the largest “sub-prime” lenders -- specialists in higher-cost loans to people with poor credit or other financial issues. Such lending boomed as interest rates fell in 2003 and 2004, with mainstream lenders such as Calabasas-based Countrywide embracing it as an important part of their operations.
The prospects for sub-prime lenders are uncertain now that most people have already refinanced their homes in the last few years and short-term interest rates have risen sharply. Most sub-prime mortgage rates are adjustable, pegged to shorter-term interest rate indexes.
Mozilo previously pledged that Countrywide would continue its strong growth in the long term, hiring employees away from competitors and increasing its market share, now about 16%.
But with its quarterly mortgage banking profit down 80% from 2004, Countrywide too may have to cut jobs in the near term, Mozilo told analysts Tuesday.
Countrywide projects that U.S. mortgage lenders will originate $2.2 trillion to $3.2 trillion in loans this year, compared with about $2.8 trillion in 2005 and $3.4 trillion in the record year of 2003. If the amount is in the midpoint of those projections, “there has to be an adjustment in terms of head count,” Mozilo said.
“In 2006 you’re probably going to see consolidation, people getting out of the business, the weaker ones folding, and that will all help us,” he said, describing Countrywide as a potential buyer of other companies.
Overall, Countrywide reported 73% higher fourth-quarter profit, earning $639 million, or $1.03 a share, compared with $370 million, or 61 cents, during the 2004 fourth quarter. Revenue was $2.6 billion, up from $2 billion a year earlier.
However, analysts had expected $1.05 a share. Countrywide’s stock fell 81 cents, or 2.4%, to $33.44. Shares of New Century rose 42 cents, to $39.23.
For the year, Countrywide earned $2.5 billion on $10 billion in revenue, up from net income of $2.2 billion and revenue of $8.6 billion in 2004.
Countrywide executives said that in addition to the sub-prime profit margin crunch, lending results suffered from several problems, including the nearly nonexistent “spread” between short-term and long-term interest rates, which has driven lending profit margins down at many financial institutions. Pretax mortgage earnings dropped 80% for the quarter, from $517 million in 2004 to $102 million.
The lending downturn was offset by stronger results from Countrywide’s consumer bank, which reported that pretax profit rose 84% to top $1 billion for the year, and its servicing, or bill collection, operations. Servicing swung from a $278-million pretax loss in the fourth quarter of 2004 to a pretax profit of $306 million this time around.
The servicing business, which is highly volatile, typically rises as profit from mortgage production falls -- a pattern that Countrywide calls its “macro hedge.” But unfortunately for the company, “the market rarely rewards Countrywide for servicing earnings,” said analyst Mark McMahon of Sandler O’Neill Partners. “The market tends to bid Countrywide up or down based on production numbers.”