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Mortgage Lenders: The Pain Deepens
The industry's retreat from riskier loans is fueling
big job cuts at Countrywide and other players
by Ben Steverman, Business Week
For the crippled mortgage industry, the bad news won't
stop.
In August, mortgage lenders announced 30,892 job cuts,
according to Challenger, Gray & Christmas (Challenger,
Gray & Christmas), a firm that tracks layoff announcements.
Speaking of the mortgage-fueled layoffs in the broader
financial services industry, the firm's CEO, John Challenger,
says, "We have not seen such a rapid descent since
the airlines shed thousands of workers" in the wake
of the September 11, 2001, terrorist attacks.
In September, the layoffs haven't slowed. A selection:
Eight hundred more layoffs at National City Corp. (NCC),
a Cleveland-based bank that cut 500 employees last month
at its mortgage business. H&R Block (HRD) will cut
575 more workers at its Option One Mortgage unit. Lehman
Brothers (LEH) will fire 850 workers, many at its Aurora
Loan Services unit. IndyMac Bancorp (IMB) plans to cut
1,000 jobs, or 10% of its workforce.
Finally, Countrywide Financial Corp. (CFC), the nation's
largest mortgage lender, plans to eliminate 10,000 to
12,000 workers, or about 20% of its headcount.
Yes, there are a few signs of hope for the industry.
Many of the bigger mortgage companies have stabilized
their financial positions as some of the weakest and
riskiest players have gone under. A few of the big players
have even hired up their defunct rivals' former employees.
And, yes, an interest rate cut from the Federal Reserve,
expected Sept. 18, might help somewhat.
But other news isn't pretty: On Sept. 13, Countrywide
announced that its average daily application volume fell
12% in August, compared to both the previous month and
a year ago. Total mortgage funding fell 17% from a year
ago.
So what's reason for the layoffs and the drop in mortgage
activity?
Major mortgage players have retreated from a large area
of the market. Nontraditional loans, such as large "jumbo" mortgages
or subprime loans to buyers with poor credit scores,
have slowed way down.
If you are a traditional buyer, with good income and
credit, "you will have no trouble getting a loan," says
Jay Brinkmann, vice president for research and economics
at the Mortgage Bankers Association Mortgage Bankers
Association. In fact, interest rates on traditional fixed
rate mortgages have actually fallen.
There's no problem here because federally chartered
Fannie Mae (FNM) and Freddie Mac (FRE), using strict
credit criteria, continue buying up those loans and re-selling
them to investors.
However, investors refuse to buy riskier loans. So,
lenders have had nowhere to unload subprime, jumbo, and
other nontraditional mortgages. There's no sign that's
easing, as secondary markets for riskier assets have
been frozen since the middle of the summer.
So, Countrywide and other lenders have stopped originating
many nontraditional loans. That's the main factor in
the decline in Countrywide's mortgage activity, says
Erin Swanson, an equities analyst at Morningstar (MORN). "It's
a shift in focus," she says, accompanied by a tightening
of lending standards. In August, 2006, 53% of Countrywide's
loans were traditional fixed rate mortgages; one year
later, 75% were fixed rate.
"Those [nontraditional] loans are being made, but
at a much higher costs," says Nancy Vanden Houten,
an economist at Stone & McCarthy Research Associates
(Stone & McCarthy Research Associates).
A Federal Reserve cut in interest rates might help a
bit, by lowering borrowing costs for homebuyers overall.
But don't it expect to help riskier homebuyers re-enter
the market or refinance. There is just too much worry
by lenders and debt investors about credit quality.
"I don't feel that there is a quick fix for this
problem," Vanden Houten says. "It's going to
take quite some time for it to resolve itself."
The Mortgage Bankers Assn. expects mortgage originations
to fall from $2.8 trillion in 2006 to $2.4 trillion this
year. Next year, the slide should continue, to $2 trillion.
Along with worries about credit risk and the freezing
up of the credit markets, the mortgage industry is dealing
with the oversupply of homes in many markets, Brinkmann
says.
Problems of the housing market and the mortgage market
actually can feed on themselves, analysts say. That could
continue until either housing prices or interest rates
get so low that many new buyers and borrowers are lured
back into the market.
The one bright spot for the mortgage industry may be
mortgages to non-residential buyers. Countrywide said
commercial real estate funding volume was $757 million
in August, up from just $273 million a year ago. "Commercial
real estate has isolated itself from problems in the
residential real estate market," Swanson says.
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