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Another day, another mortgage company has gone bankrupt or closed its doors. The latest casualty in this mortgage industry mess is the U.S.'s largest subprime mortgage lender Ameriquest Capital Corp. The privately held company shut its doors Aug. 31. Citigroup Inc. purchased the remnants of Ameriquest, which include a wholesale mortgage origination operation and a mortgage servicing business, from ACC Capital Holdings Inc., Ameriquest's parent. The rise and fall of Ameriquest is symbolic of the boom to bust the U.S. mortgage industry has recently experienced. Just look at the numbers. Overall, Ameriquest wholesale origination business produced more than $23 billion in home loans in 2006, and its mortgage servicing and special servicing platforms serviced a loan portfolio of more than $65 billion. It's no wonder Ameriquest rose to become the largest subprime lender in the country, but the company followed the fate of its peers with the rise of delinquencies of their mortgage holders.
Other high-profile subprime lenders that have fallen but have filed for bankruptcy include: Quality Home Loans Inc., Home Banc Corp., American Home Mortgage Investment Corp., New Century Financial Corp. and Alliance Bancorp. The herd of Chapter 11 filings has left the remainder of the industry a shell of its former self. Worse yet, with the most sluggish home sale numbers in years coupled with soft home prices, it looks like even more subprime lenders could keel over soon. Plus, even bigger private lenders who don't lend to risky borrowers are starting to fall as well, such as First Magnus Corp., which filed for Chapter 11 on Aug. 21. GREED CRIPPLES SECTOR Over the last seven years, the residential real estate industry grew to mammoth proportions that made owning property seem like a guaranteed cash cow. Even cable television shows such as "Flip this House" and "Property Ladder" have reflected the frenzy, documenting the highs and lows of purchasing a home for investment. But it seemed most home buyers, mortgage companies and the real estate industry, in general, only saw the rewards of owning a home. Subprime lenders, especially, were more than willing to give less-qualified borrowers mortgages. But the problem arose when the value of mortgage loans declined -- due primarily to a weakened housing market that caused a spike in consumer defaults and delinquencies on mortgage loan payments -- and lenders made additional margin calls. To raise enough cash to meet margin calls, or a demand from a lender for more collateral to secure a credit line, or a portion of the credit line be repaid, these lenders were forced to sell mortgage loans into a rapidly deteriorating secondary market. These lenders found they could not sell mortgage loans at par and therefore could not meet margin calls, triggering a default on the credit lines used to fund loan origination business. GOLIATH CUT DOWN Even Countrywide Financial Corp. -- the largest mortgage company in the U.S. -- was not immune from the subprime lending debacle. The Calabasas, Calif.-based mortgage lender was teetering on the brink of financial instability when it said it would eliminate 500 jobs on Aug. 20. The layoffs followed Countrywide's announcement on Aug. 16 it borrowed $11.5 billion from a group of 40 banks to provide it with enough short-term cash to fund its loan originations. The move triggered Moody's Investors Service and Fitch Ratings to downgrade their debt rating on Countrywide. Industry experts now speculate that Countrywide is so weakened that it is a viable takeover candidate. Enter Bank of America Corp., which came to the rescue Aug. 22, investing $2 billion in the hobbled lender. As The Deal's Peter Moreira wrote: "The investment is the latest move by public and private entities to try to end disruptions to the credit market, which were brought on by the collapse of the subprime mortgage market."
Keeping Countrywide afloat is the company's commercial banking operations. The
same circumstance is keeping lender Capital One Financial Corp. out of Chapter
11 thanks to its
2005
purchase of Hibernia Corp. and December 2006
purchase
of North Fork Bank. Both deals transformed it into a diversified financial
services company. But only eight months after the North Fork purchase, Capital
One is still feeling the pain of the subprime meltdown because of North Fork's
GreenPoint mortgage unit. Consequently, Capital One is following Countrywide's
lead and announced Aug. 20 that it would close GreenPoint, thereby eliminating
1,900 jobs. GreenPoint had specialized in jumbo mortgages and loans that
didn't need verification of the borrower's income or assets. The impact on
Capital One's near-term bottom line will be immense with the company taking an
after-tax charge of $860 million, or $2.15 a share. But, overall, Capital One
should be diverse enough to absorb those near-term loses because of its strong
holdings in credit cards, commercial loans and retail banking. The numbers
speak for themselves. The company's CFO Gary Perlin points out in a Forbes
article that Capital One has $25 billion of highly liquid securities, some of
which come from its acquisitions of North Fork and
Hibernia
and $9 billion of "AAA" credit card funding going forward. THE CRUSH Other companies aren't as lucky as Countrywide and Capital One because they are primarily mortgage lenders that don't have ancillary businesses to fall back on. According to Bloomberg LLP, at least 70 companies with links to the mortgage market have had to close or put themselves up for sale since the start of last year. Here's a general rundown of these companies:
-- Gerald Magpily with contributions from John Blakely. CategoriesComments Deal Video
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A major factor in the subprime debacle has been the Iraq War. It has exploded budget deficits, leading to higher interest rates. It also has led to higher oil prices, which makes it harder for people to make ARM payments, especially when they go up.