A Rush Into Refinancing as Mortgage Rates Fall
A Rush Into Refinancing as Mortgage Rates Fall (full article)The housing market may finally be getting some relief, with lower mortgage rates already encouraging refinancing and Treasury officials considering ways to entice new buyers.
Last week, the Federal Reserve announced that it would buy $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage rates immediately dropped, and that led to a surge in mortgage refinancing activity for the week — even with the Thanksgiving holiday.
On Wednesday, people close to the discussions said that the Treasury had been talking with Fannie Mae and Freddie Mac about ways to drive down mortgage rates to as low as 4.5 percent. That rate is about a percentage point lower than the going rates for such loans.
(full article)NY Times Labels: mortgages, real estate, refinance
Central Banks Intervene to Calm Volatile Markets
Central Banks Intervene to Calm Volatile MarketsBy VIKAS BAJAJ
Central banks around the world acted in unison to calm investors by injecting tens of billions of dollars into the financial system.
full articlecredit markets, liquidity, subprime, mortgages, marketsLabels: credit markets, global markets, liquidity, mortgages, subprime
Mortgage industry tries to block credit-repair schemes
Mortgage industry tries to block credit-repair schemesFederal regulators and lenders are reviewing a growing practice that allows borrowers with low credit scores to pay money to piggyback on accounts with good scores. Fair Isaac Corp., developer of the FICO score, said it would change its credit-scoring system by the end of the year to end the loophole.
Lenders move to stop credit repair schemesShaky borrowers pay cash to piggyback on acounts with good scores.
Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice. And after being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit scoring system beginning later this year in a way it contends will end this little-known but potentially high-impact mortgage loan loophole.
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
The pitch to those who are essentially renting their credit history for pay is seductive: You don’t need to worry about users of this service receiving duplicate copies of your credit cards, account numbers or any of your personal information. It’s essentially free money, they are told.
Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.
Buying a better score
Lenders are worried, however, that they’re taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores. Their trade group has complained to the Federal Trade Commission and is talking with the credit reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit card spots, and by January, his FICO score jumped from 550 to 715. In mid-March, he closed on his four-bedroom beige stucco house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5 percent interest rate and required no down payment.
"Everything now is score driven. I had a great mortgage history, but I got hurt because of my credit score," said Estruch, who also works as a mortgage broker, had bought and sold two houses previously, and currently owns another home in New York. Estruch said he’s current on his mortgage payments.
Companies like Largo, Fla.-based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community Web sites like Craigslist and have sponsored links on Google and Yahoo. Competitors of ICB have even reached out to mortgage brokers, lenders and real estate agents, flooding their e-mail with advertisements.
Jason LaBossiere, who founded ICB a year and a half ago, said his company receives 100 to 150 new leads daily — a number that has been growing — and those inquiries lead to 10 to 20 new clients a week.
ICB charges $900 for the first credit card account, with a discount for additional ones. The cardholder allowing the piggybacking on his or her credit history can receive $100 to $150 per slot, depending on the age and credit limit of each card. ICB pockets the rest.
The effect on a credit score can vary depending on what else is in a client’s report. But one borrowed credit card account can increase a score between 30 and 45 points, two between 60 and 90 points, and five between 150 and 205 points, according to ICB. That’s because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit card company files an updated report to credit bureaus — leading to a higher FICO score — the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card’s payment history remains on the authorized user’s credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
High scores bring lower ratesA higher credit score can save a consumer an enormous amount of money because it usually means a lower mortgage interest rate. It also can mean the difference between qualifying for a loan or not, as in Estruch’s case.
According to Fair Isaac, lenders would probably demand about a 9.8 percent interest rate on a $300,000, 30-year fixed mortgage for an applicant with a credit score between 500 and 579. That would translate into a $2,585 monthly payment for principal and interest.
But a borrower with a score between 760 and 850 seeking the same loan would qualify for about a 6 percent rate that would cost just $1,796 a month for principal and interest. That savings of $789 each month would total $284,040 over 30 years.
Kinney, the retired Army officer in California, said those borrowing his good credit history don’t get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.
Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.
"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don’t know how long before someone will decide it’s illegal. But I’m not counting on this for the long-term."
Ginny Ferguson, a mortgage broker in Pleasanton, Calif., and a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it.
"These companies are encouraging consumers to commit fraud. On a standard home loan, there’s a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan," Ferguson said.
ICB’s LaBossiere said he sees his business as a second chance for the consumer who has had little financial education to make good decisions.
"People who are our clients are spending an incredible amount of money to get their finances back in order," he said. "They’ve learned through a school of pain that it’s such an important aspect of regaining control of their lives again."
So far, federal authorities have yet to make a ruling on the practice. "What I’ve gathered from attorneys here is that it appears to be legal" technically, said FTC spokesman Frank Dorman. "However, the agency is not saying that it is legal."
Lenders, who depend on credit scores to assess a person’s ability to pay back a loan, are closely watching the practice’s growth. It also comes at a time when the industry is reeling from the a soaring default rate on subprime mortgages, home loans for people with bad credit. As a result, they’ve tightened lending standards, but the credit-renting practice threatens to undermine their efforts to reduce exposure to risky borrowers.
Score system under revisionNinety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently includes authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.
The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.
The change won’t be a quick-fix for lenders trying to weed out credit renters. Corey Carlisle, senior director of government affairs for the Mortgage Bankers Association, said it takes time for lenders to transition from one scoring system to another.
"All lenders have their own guidelines and parameters on how to use and incorporate the FICO score. It would take time to understand what’s in a new credit score," Carlisle said.
Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.
"It’s an industrywide issue and there are other scores out there," he said. This is a phenomenon that impacts more than just FICO scores."
Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents’ cards and spouses with little to no credit of their own.
But there’s no way to distinguish these from the latest crop of strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.
"As with any decision, there’s a trade-off," Quinn said. "The many honest consumers who learn good credit skills with the help from a family member, that feature will be removed. But the challenge for us is maintaining the integrity of the FICO score."
mortgages, credit repair, ICB, mortgage fraud
Labels: credit repair, ICB, mortgage fraud, mortgages
Battered home-loan industry gets boost from big investors
Battered home-loan industry gets boost from big investorsPrivate equity, hedge funds and investment banks are all jumping into the subprime-mortgage business, which has been plagued by decreased volume and rising defaults. "There is a lot of money pent up," said Steve Probst, national sales manager with Fairway Independent Mortgage. "And a lot of people are betting that the market will snap back quickly."
Big Investors Jumping Back Into Shaky Home LoansBy VIKAS BAJAJ and JULIE CRESWELL
The subprime mortgage business is in tatters: loan volume is plummeting, defaults are rising and some of the biggest lenders have cut back or shut down.
So what is the smart money — private equity, hedge funds and investment banks — doing? They are swooping in and taking over those battered businesses, seeing opportunity amid the wreckage.
“There is a lot of money pent up,” said Steve Probst, national sales manager with Fairway Independent Mortgage, a lender based in Sun Prairie, Wis. “And a lot of people are betting that the market will snap back quickly.”
It is a risky proposition.
In many parts of the country, there is a glut of unsold homes. Defaults and foreclosures are rising, putting further pressure on home prices and mortgage lending. Some housing industry officials worry that the new infusion of capital may refuel aggressive and risky lending to people with poor credit, known as subprime borrowers, delaying a much needed winnowing of the business.
Those dark clouds do not faze the new money in subprime. Among those making the biggest bets is Cerberus Capital Management, which first made its name investing in distressed debt. One of the country’s largest private equity firms, Cerberus has a record of making risky contrarian bets, including its recent agreement to take control of the troubled Chrysler Corporation for $7.4 billion.
Cerberus acquired control of the subprime lender Residential Capital last year, when it led an investment consortium that bought a 51 percent stake in G.M.A.C., the finance arm of General Motors. And in April, Cerberus, which also owns Aegis Mortgage, a subprime lender based in Houston, announced plans to acquire Option One, the troubled mortgage subsidiary of H&R Block.
Taken together, these acquisitions would make Cerberus the biggest subprime lender in the country, far ahead of large mortgage giants like Countrywide, Wells Fargo and others, according to first-quarter lending statistics from Inside Mortgage Finance.
It is unclear whether Cerberus will combine its mortgage operations into one company or operate them autonomously. Consolidating the businesses would offer streamlining and cost-cutting advantages, analysts say. Executives at Cerberus, which closely guards details about its strategy and investments, declined to be interviewed for this article and did not respond to written questions.
“They have certainly double-downed and have bought some extremely attractive operations — companies that have dominated their space,” said Brenda B. White, a managing director with Deloitte & Touche Corporate Finance. “But now they’re faced with executing on a plan, whatever that plan might be.”
This year, when rising mortgage defaults and a credit squeeze on Wall Street have forced many subprime mortgage companies into bankruptcy, some analysts predict that the industry might shrink by a third or more. Many industry officials acknowledged that a shakeout was necessary to cull the industry of the lenders that led in making risky loans and forcing rivals to match them or lose business.
In the last several months, however, private equity firms and others have acquired, taken stakes in or provided fresh capital to companies that wrote nearly 20 percent of last year’s $600 billion in subprime loans. It is, analysts and industry officials suggest, an unusually quick and substantial bet on a distressed business that by most indications is in the early phases of a long-term retrenchment.
With billions in capital available to them, investors like Cerberus, Ellington Capital and the Citadel Investment Group see an ideal buying opportunity. Yet trying to time the bottom of a sliding market has been tricky, even for smart-money investors like Cerberus. For instance, rising defaults and the cost of buying back poorly performing loans from investors left Residential Capital with more than $1.5 billion in losses in the six months that ended in March and the losses are expected to continue. (In March, General Motors, which still owns 49 percent of G.M.A.C., was forced to put an additional $1 billion into the unit because of the division’s mortgage woes.)
Cerberus has insisted on a number of terms and conditions in its deal to buy Option One, suggesting that the firm has become more vigilant about not paying too much. As announced, Cerberus agreed to pay slightly less than $1 billion, but the final amount could range from as little as $400 million to $800 million, depending on how well Option One’s business fares from now to the transaction’s closing in October, according to estimates prepared by Kelly Flynn, an analyst with UBS.
That is a far cry from the $1.3 billion H&R Block executives said earlier this year that they expected to get for the unit. H&R Block could get more money from Cerberus if Option One turns a profit within 18 months after the deal closes. Barrett Burns, who has run lending businesses for Citibank and Ford Credit, says that Cerberus and the other investors in the mortgage business are being far more prudent in their purchases than big Wall Street firms like Merrill Lynch and Morgan Stanley were when they paid hundreds of millions of dollars for subprime companies last year.
“The investment banks that were buying last year were buying at the high,” said Mr. Burns, who is now chief executive of Vantage Score, a company that provides credit scores that lenders use to evaluate borrowers.
(Both Merrill and Morgan have said they are comfortable with what they paid for their subprime acquisitions.)
Astute buyers, Mr. Burns noted, are picking up loan servicing businesses, which earn a predictable stream of fees for handling collections and dealing with defaults, and retail branch networks, which are difficult to build and tend to produce better-quality loans than wholesale channels like mortgage brokers.
Even so, industry officials say new entrants to the subprime business may be in for nasty surprises if they think the current difficult stretch represents a bottom. Making money in the business, they say, is difficult and getting harder.
Investors who buy subprime mortgages are demanding higher-quality loans after being burned by high rates of defaults and fraud in loans written during 2005 and 2006. That is forcing mortgage companies to tighten lending standards by demanding that borrowers make bigger down payments and have better credit histories, changes that have significantly reduced the pool of qualified borrowers.
“The reality is that the mortgage business for the foreseeable future is not a growth business,” said Jeffrey Kirsch, president of American Residential Equities, which buys defaulted mortgages. “So, it is surprising to see things frankly where they are.”
Mr. Kirsch and others say buyers like Cerberus will have to be willing to lose money and invest in the companies they are acquiring for some time before things pick up.
“They’re taking enormous risks here in hoping that they’ll be able to stabilize these businesses, keep them going, and get the types of regulatory approval they need to originate and service mortgages,” said Rick Antonoff, a partner in the bankruptcy and restructuring practice at the law firm of Pillsbury Winthrop Shaw Pittman. “They have put a lot of capital in already, and it’s going to take additional capital to keep these businesses going for a while.”
Those concerns are a major reason other subprime lenders have not succeeded at selling assets. New Century Financial, which was one of the biggest subprime lenders in the nation before it filed for bankruptcy protection in April, failed to attract bids for its loan origination unit in a bankruptcy auction because regulators in several states including California had restricted it from making more loans. (Cerberus had briefly considered acquiring New Century before it filed for bankruptcy, according to industry officials who asked not to be identified because they were not authorized to speak about the matter.)
In other instances, investors have put more capital into subprime after securing concessions that would have been unthinkable even six months ago.
In April, Accredited Home Lender, a San Diego-based lender, raised $230 million in loans from Farallon Capital, an investment firm based in San Francisco. The mortgage company agreed to pay a 13 percent interest rate and penalties if it sought to pay off the debt ahead of time. The company also gave Farallon warrants that would allow it to increase its stake in Accredited to 19 percent, from 7 percent. The warrants allow Farallon to buy the company’s shares for $10 apiece, a discount to the stock’s $13.99 closing price yesterday.
Another hedge fund, Second Curve Capital, that bought an 8.5 percent stake in Accredited in early February when the stock was trading at $25 to $30, has increased its stake in the company to 11.2 percent as the stock has fallen.
Citadel, an aspiring financial conglomerate based in Chicago, picked up the lending business of ResMae for just $22 million. Ellington Management, a hedge fund based in Greenwich, Conn., that specializes in mortgage-backed securities, has agreed to pay an undisclosed sum for the lending business of Fremont General, which has not made a subprime loan in almost three months and has cut 2,400 jobs in its lending business.
It is unclear how these investors will operate their new subprime businesses — most declined to discuss their plans or did not return calls for comment — but at least one mortgage company said it was concerned about lending standards weakening again.
“There is a lot of fear that expansion starts again because liquidity is coming in,” said Stephanie Christie, a senior vice president in charge of nonprime lending at Wells Fargo Home Mortgage. “The industry needs to be very serious about prudent underwriting and make sure we don’t go back to making bad loans.”
At the same time, however, analysts note that the new capital could help alleviate the credit squeeze many regulators and housing advocates feared would impede borrowers who want to buy homes or need to refinance out of onerous mortgages.
“No one wants to see subprime lending dry up altogether,” said Kathleen Shanley, an analyst with Gimme Credit, a research firm, “because of the potential implications for growth in the housing market and the hardship for existing borrowers who may need to refinance their loans.”
full articlemortgages, subprime, investment banking, private equityLabels: investment banking, mortgages, private equity, subprime
Chain reaction brings down subprime-lending industry
Chain reaction brings down subprime-lending industryThe once profitable partnership between Wall Street investment banks and subprime lenders is unraveling after a "chain reaction of delinquency, default and foreclosure," resulting in billions of dollars in losses. More than 50 U.S. mortgage companies have put themselves up for sale since the beginning of 2006. With home prices sinking and default rates climbing, bond investors stand to lose as much as $75 billion on securities backed by subprime mortgages.
Subprime Fiasco Exposes Manipulation by Mortgage Brokerages
By Seth Lubove and Daniel Taub
May 30 (Bloomberg) -- Taher Afghani was working for discount retailer Target Corp. near San Francisco when friends told him about the riches to be made in California's Mortgage Alley.
It was 2004, and the U.S. real estate market was on fire. Down in Southern California, a hub for lenders specializing in loans to people with weak, or subprime, credit, Afghani's pals were making a fortune pushing risky mortgages on homebuyers. After tagging along with a buddy on a company trip to Los Cabos, Mexico, Afghani quit Target, headed south and began hustling loans at Costa Mesa-based Secured Funding Corp.
``I had never seen so much money thrown around in one weekend,'' Afghani, 27, says of the Cabo getaway. ``It was crazy. All these kids, literally 18 to 26, were loaded -- the best clothes, the cars, the girls, everything.'' Soon Afghani, who'd made $58,000 a year managing a Target distribution center, was pulling down $120,000.
Mortgage salesmen like Afghani, many of them based in Orange County, near Los Angeles, lie at the heart of the once-profitable partnership between subprime lenders and Wall Street investment banks that's now unraveling into billions of dollars in losses.
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. Since the beginning of 2006, more than 50 U.S. mortgage companies have put themselves up for sale, closed or declared bankruptcy, according to data compiled by Bloomberg.
California Connection
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.
Subprime SinkholeThe 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.
Cutting BackThe imprint of ``Secured Funding'' is all that remains of the corporate logo that once graced the outside of the two-story building. Above it is a ``For Lease'' sign advertising the 82,333- square-foot (7,649-square-meter) building.
``They cut way back,'' a construction worker says, shrugging. What little remains of Secured Funding is now housed in a building across the near-empty parking lot, where a receptionist tells a caller: ``Our wholesale division is closed. We're no longer doing business with brokers.''
The subprime industry -- and investors' losses -- would never have gotten so big were it not for a small army of independent mortgage brokers and hustling salesmen like Afghani, who was fired in October.
Afghani and other subprime veterans say their job was to reel in borrowers, period. Never mind whether customers needed loans or could manage payments.
Making the PitchAfghani says sales pitches typically focused on what a borrower could do with all of that money rather than on fees buried in paperwork or annual interest rates as high as 10.5 percent at the time, at least 2 percentage points more than the rates that banks charge people with good credit.
``Even with explanations, most borrowers didn't really understand what types of loans they were getting,'' says Maureen McCormack, another former Secured Funding employee. ``They just cared about the monthly payment.''
The sales job was made easier with exotic mortgages such as so- called no-doc loans, which enable borrowers to get loans without having to supply evidence of income or savings, and option ARMs, adjustable-rate mortgages that let people pick how big a payment they will make from month to month. The loans offer upfront teaser rates at the cost of tacking the deferred payments onto the balance of the loan.
``Heavy sales pressure has been part of the most-egregious lenders for a while,'' says Kurt Eggert, a professor at Chapman University School of Law in Orange, California, who has studied the role of aggressive sales tactics in subprime lending and sued lenders on behalf of elderly borrowers caught up in home equity scams.
Sold to Wall Street
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.''
Down the ChainLenders push sales of subprime loans as far down the chain as possible to vast networks of brokers. While independent brokers account for about half of all mortgage originations, they handle as much as 70 percent of subprime originations, according to the Mortgage Bankers Association of America.
Many of the biggest subprime casualties, including Fremont General; Kansas City, Missouri-based NovaStar Financial Inc.; and New Century Financial, would never have grown as fast as they did without their ability to outsource the bulk of their sales to outside brokers and salesmen.
New Century, before tumbling into bankruptcy on April 2, used a network of 47,000 mortgage brokers and 222 branch offices to grow to $59.8 billion in annual loans last year from just $400 million in its first year, in 1996, according to company filings.
Lawsuits Mount
Fremont originated a peak of $36.2 billion in subprime loans in 2005, up from $3.3 billion in 2001, largely through ``independent loan brokers,'' according to company filings. The company ended its subprime business in March.
Even before the bottom fell out of the subprime market, NovaStar and other lenders were defending themselves against lawsuits that accused the companies of using independent brokers and branch salesmen to exploit borrowers with high-cost loans.
A lawsuit filed against NovaStar in federal court in Memphis, Tennessee, in April 2006, for example, centers on allegations that NovaStar used mortgage brokers to prey on minority borrowers, in this case a 61-year-old black woman who claims to have heard pitches for ``easy money'' on a local gospel radio station.
Among other allegations, the plaintiff, Mae Jackson of Memphis, claims she was never informed about the terms of the loan, including the amount, the interest rate or the closing costs. In her complaint, she attacks NovaStar's practice of using mortgage brokers who employ ``deceptive high-pressure tactics to foist these unfair and discriminatory subprime loans onto unsuspecting minority borrowers.''
Blaming Brokers
In court filings, NovaStar pins the blame on the mortgage broker, Memphis-based Worldwide Mortgage Corp., which filed for bankruptcy in April 2006. In a separate statement, NovaStar says that contrary to the plaintiff's portrayal of herself as naive, Jackson was a ``real estate investor who owned five properties at the same time.'' Neither she nor her attorneys have provided any evidence of discrimination, NovaStar says. Jackson couldn't be reached for comment.
Like many subprime lenders, NovaStar spread its tentacles by tapping into a broad base of mortgage brokers and so-called net branches. A net branch enables an independent broker to set up shop under NovaStar's or some other company's banner with little upfront investment, much less a state license, and quickly begin brokering loans to kick upstream to the parent.
NovaStar made great use of the technique: By the end of 2004, it had expanded its number of branches to 432 from four at the beginning of 2000. At their peak in 2003, NovaStar's branches brought in $1.2 billion of loans, a fifth of the total $6 billion in subprime loans originated by the company that year.
`Competitive Advantage'``The branches represent a competitive advantage for NovaStar as we seek greater market share,'' the company said in its 2003 annual report.
Several lawsuits filed against NovaStar paint a more sinister picture. They claim the company played fast and loose with state licensing requirements in an effort to make results look better than they might have without the aid of the branch loan sales.
``NovaStar had woefully failed to comply with federal and state regulations as a result of defendants' efforts to expand the company's business at all costs,'' alleges one 94-page complaint filed in November 2004 in federal court in Kansas City and certified as a class action this past February. The firm is facing at least seven class actions, according to Bloomberg data.
Among other allegations, the Kansas City lawsuit claims NovaStar fraudulently puffed up borrowers' assets to qualify customers for loans. One unnamed former employee, identified as a ``loan officer'' who worked in California from 2002 to '03, told plaintiffs' lawyers that employees would apply an ``X-Acto knife and some tape'' to borrowers' W-2 forms and paychecks to qualify them for loans.
`Inflammatory Allegations'
The same employee said that on other occasions, the company would temporarily deposit $5,000 in the bank account of a potential borrower to inflate his or her assets. NovaStar would either take the money back or increase the loan fees, according to the lawsuit filed by co-counsel Milberg Weiss & Bershad LLP of New York.
``NovaStar believes it is irresponsible to continue to print the false and inflammatory allegations regarding lending activities contained in this lawsuit, given that the plaintiffs have never produced any evidence to support them and they are not actually a part of the underlying claim,'' NovaStar spokesman Richard Johnson said in a statement.
Johnson says three state and federal licensing and compliance actions involving the branches filed against NovaStar that are detailed in the lawsuit amount to much ado about nothing.
``None of NovaStar's operations in these states, or nationwide, were materially affected or in danger of being materially affected, in any way, and therefore those actions did not require disclosure at the time,'' Johnson said in his statement.
Regulatory Patchwork
The company announced in April it was exploring ``a range of strategic alternatives,'' including a sale.
The proliferation of lightly licensed sales branches was enabled in part by a patchwork of regulations that cover independent mortgage brokers and lenders. While banks are overseen by federal and state regulators, mortgage brokers and independent sales outfits are overseen by a menagerie of state authorities, some of which also look after barbers and masseuses.
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.
California Law``That's the way the law is in California,'' says Mark Leyes, director of communications of the state's Department of Corporations. ``We license the entity. They can have people working for them who are not licensed by us.''
Such loose regulatory oversight, combined with California's frenzied real estate market, helped make the state a natural destination for the subprime business.
Even NovaStar, while headquartered in Kansas City, maintained a large presence in Orange County. Half of the 20 biggest U.S. subprime lenders were in California, including three in Orange County's Irvine, according to Inside Mortgage Finance, a Bethesda, Maryland-based industry newsletter.
Orange County was also the home of Secured Funding, which specialized in home equity loans, or second mortgages, to people with lousy credit. The firm was founded in 1993 by Lorne Lahodny, who eventually built it into a 1,000-employee operation in Costa Mesa that closed more than $1.25 billion of loans by 2005, according to a company fact sheet. Neither Lahodny nor his partner in Secured, John Lynch, responded to messages left by phone and in person at their offices.
Internet TrollingSecured Funding's success was fueled by sales leads generated by millions of pieces of direct mail and Internet trolling, Afghani and other former salesmen say. Typical of the direct mail was a credit card offer. When potential customers called to activate the card, they were instead hooked up with a Secured Funding account executive such as Afghani.
Afghani describes chaotic office scenes that recall ``Boiler Room,'' a 2000 movie about stock brokers at a Long Island wire house. To spur sales, Secured Funding broke its salesmen into color-coded teams.
``If you weren't turning those calls into applications, they would drag you out and make your life miserable,'' he says. ``The turnover was unbelievable,'' says Afghani, who says he watched eight people pass through the neighboring desk in seven months. ``If you didn't cut it right off the bat, you were just fired.''
Dane Marin, who worked at Secured Funding for a year, says managers harangued everyone. ``If you weren't on the phone very long, you'd get an e-mail saying, `Get your head out of your ass,''' he says.
Easy MoneyAfghani says he and fellow brokers dispensed with details about rates and fees and instead talked up how borrowers could use home equity loans to pay down other debts. ``It was easier than financing a car,'' Afghani says of getting a mortgage.
At times, Secured Funding salesmen broke the rules, according to at least three lawsuits filed last year in federal courts in St. Louis and Milwaukee. The plaintiffs accuse Secured Funding of accessing their credit reports without permission for the purpose of sending them unsolicited loan offers.
In one case, Secured Funding sent the plaintiff a ``personalized Platinum Equity Card'' offering ``$50,000 or more in cash'' just for calling Secured's toll-free telephone number. In the other two lawsuits, Secured sent bogus $75,000 checks that reassured the recipients their ``Less Than Perfect Credit Is OK!'' Afghani says the firm was blasting consumers with as many as 4 million pieces of mail a month.
In answers to the complaints, Secured Funding denied wrongdoing. The company said it followed federal regulations when accessing ``consumer reports'' to pitch customers.
Lakers and LimosSecured Funding's attorney in the lawsuits, Richard Gottlieb of the Chicago office of Dykema Gossett PLLC, resigned in April, citing ``irreconcilable professional differences'' with Secured Funding. Gottlieb declined to comment.
However the leads came in, Secured Funding's salespeople made sure the fish stayed on the hook. ``You would say anything to get the loan through,'' says Cristopher Pike, who worked at Secured in 2005 and '06.
Secured Funding hung photos of sales incentive trips, like the one to Cabo, around the office. As sales boomed in early 2006, limos would pull up at the office to take salesmen to Los Angeles Lakers basketball games, Pike recalls. The parking lot was so clogged with luxury cars that employees had to valet-park or board a shuttle bus to get to the office.
Watching Salesmen
Charlyn Cooper, a former Secured underwriter, says she kept an electric scooter in her trunk to travel as far as a mile from her car to the office. ``They all used to laugh at me,'' says Cooper, who was dismissed in October. ``They had a van that would come by and pick you up from your car, but the van was always full.''
Cooper's job was to rein in the salespeople and make sure paperwork was legitimate so Secured Funding could sell its loans upstream. She says Secured Funding unloaded most of the loans on HSBC Holdings Plc's HSBC Finance unit, which has been racked by the subprime blowup. The bank said profit at its U.S. unit plunged 39 percent during the first quarter, primarily because of an increase in U.S. loan defaults, including the second-lien loans that were Secured Funding's specialty. Provisions set aside for credit losses almost doubled to $1.7 billion.
Unwanted ScrutinySecured Funding salespeople didn't always appreciate Cooper's scrutiny of loans, she says. ``Sales guys are always going to cry because they work on commission,'' she says. Salesmen such as Afghani made as much as $3,250 on each loan.
Cooper cross-checked borrowers' stated salaries to, say, weed out any custodians or maids who claimed they earned $10,000 a month. ``There's that push-pull with sales because they're like, `Why are you arguing with me,' and I say, `Sorry, a bus driver is not making $10,000 a month,''' Cooper says.
Many subprime sales techniques are now spilling out in the lawsuits, advocacy reports and Congressional hearings that predictably follow such industry meltdowns. Several lawsuits illustrate the lengths to which the big wholesalers, and ultimately Wall Street, were able to outsource the selling of the loans as far down the chain as possible. Fremont General's Fremont Investment & Loan, Wells Fargo & Co.'s home mortgage unit and a rogue's gallery of mortgage brokers come under such scrutiny in a lawsuit filed in August 2006 in San Mateo County, California, state court.
Claims of Fraud
Plaintiff Johnnie Damon claims he was ``fraudulently induced'' to take out a $484,000 loan from Irvine-based mortgage broker Peak Funding Inc., which allegedly falsified Damon's financial records to qualify him for the loan. Damon claims he asked for a reverse mortgage, which enables homeowners to borrow money in the form of payments charged against their home equity, and instead got a ``traditional refinance loan'' without his knowledge.
Also without Damon's knowledge, the claim says, the mortgage broker falsified information on his loan application, such as his monthly income, to qualify him for the loan.
Fremont sold servicing rights on the loan, which is the right to process monthly payments, to San Francisco-based Wells Fargo and flipped the loan itself to Paris-based Societe Generale SA. Wells Fargo is also named as a defendant for ignoring ``fraudulent and predatory lending practices'' in the loans it purchases and services, according to the lawsuit.
The complaint also alleges that Fremont, prior to its recent decision to exit the subprime business, was using mortgage brokers to do its dirty work.
`Trivial Role'
``Fremont has a history of intentionally turning a blind eye to fraudulent and predatory lending practices by the mortgage brokers who generate home loans for the company,'' the lawsuit alleges without citing any other specific examples.
Expanding on the accusations, Damon's attorney, Aaron Myers of Howrey LLP, says Fremont funded a loan made ``by a bunch of crooks who completely misled the borrower, falsified his income, coerced him into the loan and then tricked him into sending the loan proceeds back to the company.''
In answers to the complaint, all of the defendants deny the accusations.
``Wells Fargo's trivial role in this case is punctuated by the fact that it has not caused the plaintiff any harm,'' Wells Fargo's attorneys said in an Oct. 10, 2006, court filing, adding that they put a hold on the loan after the dispute erupted. ``Wells Fargo does not belong in this case.''
Robert Cannone, a former chief financial officer and director of Peak Funding who's also listed as a defendant by name, says the firm closed last October after it ran out of money. He neither admits nor denies wrongdoing.
`So Embarrassed'
``I'm so embarrassed,'' Cannone says in a telephone interview. ``I feel really bad.'' He says that of the 100 loans made by Peak, this is the only one in dispute. He says an employee connected with the Damon loan ``went off the reservation.''
When the boom went bust, even people on the periphery of the industry got caught in the downdraft.
Carrie Feinman worked in Scottsdale, Arizona, in the wholesale prime lending division of New Century Financial, which acquired nonsubprime loans from smaller lenders and mortgage brokers.
The relative health of her side of the business, which New Century acquired from Royal Bank of Canada in 2005, couldn't stop New Century's troubled subprime lending from dragging the entire company into Chapter 11 on April 2.
Feinman says the news that the company was filing for bankruptcy came out of the blue, leaving her and most other employees out of pocket on unused vacation time and severance pay.
``We were shocked,'' says Feinman, who's looking for a job. ``If I had quit the week before, I would have gotten my vacation time. You wonder why no one is loyal to employers anymore.''
`Enough Is Enough'A month after leaving Secured Funding, Afghani took a new job at Irvine-based Solstice Capital Group Inc., another subprime lender. HSBC, the same bank that had been buying loans from Secured Funding, bought Solstice last year for $50 million. Afghani quit in April, vowing to find a new line of work.
``Enough is enough,'' he says, adding the good times are long gone. ``I'm so rock bottom I had to move out of my apartment in Irvine and live rent free with my girlfriend.''
The hard knocks have taught him a lesson, Afghani says. ``It was tough love and a great learning experience to live within your means and not end up like the individuals on the other side of the phone,'' he says.
To contact the reporters on this story: Seth Lubove in Los Angeles at
slubove@bloomberg.net Daniel Taub in Los Angeles at
dtaub@bloomberg.netFull articlemortgaged backed derivatives, mortgages, subprime, lendersLabels: lenders, mortgaged backed derivatives, mortgages, subprime
Speed of subprime bust surprises lenders
Mortgage market unstable?Surprise was the key word Monday at the Mortgage Bankers Association's National Secondary Market Conference & Expo in New York, as many were shocked at the quick collapse of the subprime-mortgage market. The quick market sell-off has led to the demise of many lenders in the industry, and many loans are no longer even possible for clients.
Speed of subprime bust surprises lendersMany mortgage lenders expected a subprime meltdown, but not one that came so fast and strong.
By Les Christie, CNNMoney.com staff writerMay 23 2007: 8:18 AM EDT
The subprime mortgage meltdown has been a shock to industry insiders, but now they say it's hitting harder and faster than expected - even to those who predicted the crisis in the first place.
That was the message Monday from a panel of leading industry executives on the state of the mortgage lending industry at the Mortgage Bankers Association's National Secondary Market Conference & Expo in New York.
Michael Marriott, a panelist and managing director for Credit Suisse, said, "Last October, I predicted the subprime market would collapse and many issuers would go out of business. But the violence and speed of the market sell-off surprised people."
David Lowman, a panelist and chief executive of JPMorgan Chase & Co.'s global mortgage business, said, "35 percent of what once could be done, can no longer be done," referring to mortgage loan products that have effectively been taken off the shelves.
And speaking separately from his Atlanta office, Duane LeGate, president of House Buyer Network, a specialist in short sales and foreclosure prevention, said one of the real estate agents he works with had six deals blow up within four days because, "The loan originator told him, 'We're not offering [these products] anymore.'"
According to LeGate, this kind of thing just started to happen in the past month or so.
Allen Hardester, director of business development for mortgage broker Guaranteed Rate, said many once-common subprime loans products are now almost impossible to find.
Mortgage lenders get creative "Anything that smacks of no-income and no-documentation is history," he said. "Anything above 85 percent to 90 percent loan-to-value, anything non-owner occupied, anything ludicrous as to value - like someone stepping up from a $1,000 a month payment to a $6,000 a month - is history."
Lenders are also scrutinizing applications much more carefully, and many don't like what they find. Lowman said he had recently looked at a low-documention application for a UPS driver who earned a quarter of a million dollars last year - or so the application stated. Fictional claims, often involving outside income, are far from unusual.
"If you took into account every person with a lawn care service on the side, there wouldn't be a blade of grass left in the United States," he said.
Investors who buy and sell bonds backed by the mortgage payments of ordinary homeowners have seen bad loans rise and have told lenders and brokers they will no longer buy whole classes of securitized mortgages, which can quickly pull the plug on a prospective home buyer.
Lauren Pephens, managing principal of financial services advisory firm, Pephens & Co., called it the "push-down effect" at a session on loss mitigation at the MBA conference. She said that some buyers have gone to close the deal only to be told that their financing had fallen apart.
All the fudging, the lax underwriting, the push for loans that went on during the housing boom were facilitated by the rapid rise of home prices. Outsized increases in home equity in many U.S. housing markets covered a multitude of sins and encouraged lenders to extend loans to poor risk borrowers.
If an owner couldn't afford to pay the monthly mortgage bill when her hybrid adjustable rate mortgage reset at a much higher interest rate, well, that was just fine. Latest home prices Her home had gone up in value from $200,000 to $300,000 in the interim, and she could tap that extra $100,000 in home equity to pay her bills. If worse came to worse, she could sell her house at a big profit and pay off the entire bill. But when homes became unaffordable for too many buyers starting in 2006, "The people who were driving up prices couldn't drive them up further," said Hardester.
The speculators, the flippers and rehabbers fled. Houses went on the market and just sat. Inventories lengthened, home builders started pulling back and foreclosures climbed.
A drop is seen before recoverySo far the turnaround on prices has not been huge - unless you compare it with what immediately came before. In 2006 the median U.S. home price rose 13.6 percent, and in 2005 it climbed 8.8 percent, according to the National Association of Realtors. Now the industry group has forecast a drop in home prices this year.
MBA's chief economist, Doug Duncan, who was at the conference, predicted his own housing-price decline of 2.7 percent for 2007. Factoring in inflation of about 2 percent, the decline in real dollars is between 4 percent and 5 percent.
Duncan had said a recovery would begin mid-year but he's revised that forecast, delaying his predicted rebound until the fourth quarter of 2007.
Despite their surprise at the speed and depth of the subprime meltdown, Marriott, Lowman and their fellow panelists expected a quicker recovery than Duncan.
The group, which also included Patti Cook, an executive vice president with Freddie Mac, and Thomas Lund, an executive vice president with Fannie Mae, cited a strong economy, low unemployment and favorable demographic growth for their optimistic stance that recovery will come soon.
The recovery will "play out quicker than in the past," according to Lowman, "because [the fall] happened faster than in the past."
Full articlesubprime, mortgages, mortgage backed securities,Labels: mortgage backed securities, mortgages, subprime
Subprime woes spark fears of spreading troubles in global markets
Subprime woes spark fears of spreading troublesAs the subprime-mortgage industry declines at a rapid pace, many are concerned with the sector's influence on the markets. The situation has prompted calls for action from lawmakers, and some in the mortgage industry say investors are causing a liquidity crisis.
The full storyWhat's really at stake in the subprime mortgage market?
Read this to report.stock market, bonds, mortgages, mortgage backed securities, mbs, subprimeLabels: bonds, MBS, mortgage backed securities, mortgages, stock market, subprime
Bernanke calls on Congress to limit role of Fannie Mae, Freddie Mac
Bernanke calls on Congress to limit role of Fannie Mae, Freddie MacFederal Reserve Chairman Ben S. Bernanke called for tougher regulation of mortgage agencies Fannie Mae and Freddie Mac, saying the government-chartered mortgage-funding companies should be forced to concentrate almost entirely on loans for affordable housing. Bernanke also said that poor decisions by the government-backed programs, which have been riddled with problems in recent years, posed a threat to the U.S. economy.
Full StoryFannie Mae, Freddie Mac, FNMA, FDMC, mortgages, mortgaged backed securities, derivativesLabels: derivatives, Fannie Mae, FDMC, FNMA, Freddie Mac, mortgaged backed securities, mortgages
Subprime fiasco troubling because of scale
Subprime fiasco troubling because of scaleThe trouble brewing in the subprime-mortgage market has a familiar feel to it, writes Gretchen Morgenson for The New York Times. The real concern, however, is the scale of the trouble as the mortgage-securities market in the U.S. is a $6.5 trillion business.
Full storyLabels: derivatives, mortgage backed securities, mortgages, subprime
Pioneer in mortgage-backed securities dislikes the new style market
Pioneer in mortgage-backed securities dislikes the new style marketMore so than perhaps any other single person, Lewis Ranieri is the reason that there's a market in mortgage-backed securities. But the legendary trader who helped create the game isn't too pleased by the changes in the market.
more infomortgages, MBS, mortgage backed securitiesLabels: MBS, mortgage backed securities, mortgages
SubPrime spiral can hurt MBS markets
As subprime loan market sinks, worries grow of a wider problemTwenty-one subprime lenders have filed for bankruptcy since December. The shakeout in the industry, which caters to making home loans to buyers with less-than-desirable credit, may auger more widespread problems in the economy and mortgage-backed securities.
Full storyloans, lending, subprime, mortgages, MBS, mortgage backed securities, bond markets
Labels: bond markets, lending, loans, MBS, mortgage backed securities, mortgages, subprime
