After years of easy profits, a chain reaction of delinquency, default and foreclosure has ripped through the subprime mortgage industry, which originated $722 billion of loans last year.
Lenders such as Irvine, California-based New Century Financial Corp.; Orange, California-based ACC Capital Holdings Inc.; GMAC LLC's Residential Capital home lending unit; and General Electric Co.'s WMC Mortgage Corp. division have slashed more than 5,000 jobs. On May 22, Santa Monica-based Fremont General Corp., whose loans helped trigger the subprime crisis, agreed to sell its commercial real- estate unit for $1.9 billion.
The upheaval in Orange County, home of Disneyland and birthplace of Richard Nixon, has sent shockwaves throughout the financial world.
Brokers are merely the first link in a chain stretching from mortgage companies, which originate loans; to wholesale lenders, which bundle them together; to Wall Street banks, which package the bundles into securities; and finally to commercial banks, hedge funds and pension funds, which buy these investments.
The pain has only just begun. As home prices sink and mortgage defaults climb, bond investors who financed the U.S. housing boom stand to lose as much as $75 billion on securities backed by subprime mortgages, according to Newport Beach, California-based Pacific Investment Management Co.
Companies from Detroit-based General Motors Corp. to Zurich-based UBS AG have fallen into the subprime sinkhole.
At GM, profit plunged 90 percent during the first three months of 2007 because of mortgage losses at its 49 percent-owned GMAC finance company.
Swiss banking giant UBS said in May that it would shut its Dillon Read Capital Management arm after the hedge fund manager lost 150 million Swiss francs ($123 million) in the first quarter, partly on subprime investments.
Subprime originations fell 10.3 percent to $722 billion in 2006 from a record $805 billion in 2005, according to JPMorgan Chase & Co. Credit Suisse predicts a 40-60 percent slide this year.
The party is over in Orange County. These days, Secured Funding's once-buzzing office building in Costa Mesa, near John Wayne Airport, is gutted.
However brokers snared customers, lenders in California typically sold the loans to big banks or Wall Street firms. Under U.S. law, investors who buy mortgages or securities backed by them are typically not susceptible to lawsuits alleging fraud on the part of brokers.
Such protection partly explains why the U.S. mortgage-backed- securities market has ballooned. The market more than tripled since 2000; $2.4 trillion of MBSs were issued last year, according to the Securities Industry and Financial Markets Association in New York. Last year was the first time more than half of the securities issued were backed by subprime and other nonconforming loans, according to the trade group.
``The market is driven by volume and passing along the risks associated with it,'' says Paul Leonard, director of the California office of the Center for Responsible Lending, a Durham, North Carolina- based consumer advocacy group. ``With the appetite of the secondary market, neither brokers nor originators had much accountability.''
In California, which accounts for about 40 percent of subprime borrowing in the U.S., no one even knows how many people are originating loans, according to an October 2006 report by the California Association of Mortgage Brokers. That's because while the state licenses individual mortgage brokers, anyone can work for a big lender under the umbrella of a single corporate license. The group estimated that a minimum of 600,000 people were peddling loans in the state last year.
``In other words, the corporation can hire a loan originator right off the street and have them originating loans that day without any education, licensing or individual accountability,'' the report said.
community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.
