Like Maribella, many were hit hard by a wave of investors, such as investment banks, hedge funds and pension funds, asking the companies to buy back bad loans that defaulted almost as soon as they were made. So far, the turmoil largely has been confined to subprime lenders, although defaults appear to be rising in so-called Alt-A mortgages, loans a notch above subprime but still below prime.
The subprime industry barreled into action during the housing boom, offering a slew of mortgage products including 100 percent financing, adjustable rate mortgages with low teaser rates, and loans with little or no income documentation. Subprime loans are 13.56 percent of the $10.03 trillion U.S. mortgage market, or $1.36 trillion, according to the Mortgage Bankers Association. That's about 5.77 million mortgages.
Lenders forced to take back loans can go back to the mortgage broker responsible for them and try to refinance them. They also can try to sell them to scratch-and-dent loan buyers for anywhere from 50 to 90 percent of the original value.
White said Maribella employees who bought home loans from mortgage brokers diligently checked documents for fraud. FBI agents trained his staff on fraud detection, White said. Nonetheless, people lied about incomes and inflated home values. He estimates that about 5 percent of his buybacks involved some kind of fraud.
As Maribella closes down, White's ongoing traditional mortgage business is adjusting to tightening lending standards across the board, not just for subprime loans. But other small traditional prime lenders may go by the wayside as the restrictions shrink the pool of potential buyers, he said.
"A day doesn't go by that I don't get guideline restrictions from investors," White said. "Products are going away every single day."
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