As the housing market slows, the booming subprime real estate loan market – loans for people with less-than-stellar credit – is also slowing, observers say, despite a long runup.
“In general, there’s been a subprime boom over the last two years,” said Jeffrey DerGurahian, senior vice president of capital markets at Metrocities Mortgage, “but Wall Street is getting concerned about the risks in these loans.
“Right now the execution selling loans to Wall Street is not as attractive as it used to be. People are afraid of the credit risk going toward a slowing market,” the senior vice president said.
Subprime loans are loans to people with less than excellent credit, poor employment records or other problems that prevent them from getting traditional loans. Because the risk is greater, the interest rate charged is generally higher.
As early as December 2005, one industry veteran predicted that “exotic” loans, a category that includes subprime loans, would be curtailed in 2006.
“The secondary market is tired of creative financing products and is starting to price against them,” said Pat Stone, vice chairman for Metrocities Mortgage’s board of directors and former chief executive officer of Fidelity National Information Systems.
In another ominous sign for the subprime arena, Irvine-based mortgage lender ECC Capital Corp. said Jan. 6 that it would eliminate 27 percent of its workforce, or more than 440 jobs, amid a cooling trend in the home loan business, media reports said. ECC specializes in subprime loans.
ECC’s main subsidiary, Encore Credit Corp., which funds loans through independent mortgage brokers, will consolidate seven processing centers into three sites in Irvine, Calif.; Downers Grove, Ill.; and Glen Allen, Va., the Los Angeles Times reported.
The subprime industry suffered another hard knock this week as Ameriquest Mortgage Co., another subprime lender, finalized a $325-million settlement of allegations that it deceived borrowers, falsified loan documents and pressured appraisers to overstate home values. Whether this development will affect the subprime lending market has yet to be seen.
These various reverses are the first in many years for the subprime market, which has been growing by leaps and bounds since 1999, according to James Croft, founder of the Mortgage Asset Research Institute in Reston, Va.
Indeed, subprime loan originations grew more than ninefold, from $35 billion to $332 billion, between 1994 and 2003.
Subprime loans totaled $403 billion in 2004, 17.6 percent of all originations, according to the data produced by the 2004 Home Mortgage Disclosure Act Data, Mike Fratantoni, senior economist with the Mortgage Bankers Association, said.
And, though data for all of 2005 isn’t yet available, subprime originations grew to 21 percent of total originations for the first half of 2005, according to the Midyear 2005 Mortgage Originations Survey, Fratantoni said. Prime loans comprised 65 percent of all originations for the first half of 2005.
But the party may be over, with bonds backed by subprime home loans losing about 2.5 percent since September, Bloomberg reported in December.
“With interest rates having risen and prices having risen and leverage by borrowers having risen the risks of owning subprime-backed mortgage bonds have been increasing. That concern is likely warranted,” noted Keith Gumbinger, vice president of HSH Associates, a publisher of consumer loan information.
Indeed, many industry observers expect the loan market in general to decline this year.
The MBA is projecting a drop of approximately 20 percent in total mortgage originations in 2006 compared to 2005, “industry-wide, for all types of loans,” Fratantoni said. “There is going to be a decreased demand for mortgages.”
For this reason, the senior economist said, subprime lending will slow.
“It is a substantial part of the market and it is going to behave in a manner similar to the rest of the market because it’s such a big component,” said Fratantoni.
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