February 1, 2006

Cracks In Subprime Armor

The LA Times has this report on infighting among subprime lenders. “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. ‘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.” “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. 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.” “‘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. 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.”