This week Middletown, CT-based subprime lender Mortgage Lenders Network USA (MLN) pulled the plug on its loan originating operations after growing from 7 to 1,800 employees in 10 years.
Considered the 11th largest subprime mortgage company, feeding some 12,000 brokers, Agoura Hills, CA-based Ownit Mortgage Solutions bought the farm in late 2006. It recently filed bankruptcy to stave off investors including Merrill Lynch & Co., JPMorgan, Chase & Co., Credit Suisse First Boston and other mortgage purchasers who were demanding Ownit own up and buy back more than $165 million in loans on which borrowers had missed payments.
Early last year, the nation's largest subprime lender, Ameriquest Mortgage, agreed to a record $325 million predatory lending settlement and then proceeded to cut 3,800 jobs and shutter branches.
Ameriquest, along with partner lender Argent Mortgage, H&R Block's Option One, Sebring Capital Partners, NetBank and a growing list of other subprime lenders all have lending operations that have either shut down or are facing the auction block, chopping block or some other action to pull the plug on the risky business of subprime lending.
Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of their lack of credit or previous credit problems. They have been sold as an opportunity to achieve the American Dream for those who otherwise may have been locked out.
Apparently, some consumers were sold a bill of goods.
Studies reveal many subprime borrowers get hooked and refinance from one subprime loan to another, losing equity each time to cover the cost of getting a new loan. Others, already living on the financial edge, can't hack it if they are laid off or face some other wage wilting event.
And there are more and more of them.
Federal Reserve Chairman Ben S. Bernanke, speaking in early November at the Opportunity Finance Network's Annual Conference in Washington, D.C. said in 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime.
The percentages are higher in more populous metropolitan areas where a greater concentration of immigrants and more credit challenged borrowers live.
Foreclosures were way up in 2006, according to the newest report, this one from Default Research in Mt. Pleasant, PA and subprime loans get much of the blame.
The company said the largest increase in foreclosure activity was in Nevada (up 166 percent); while the smallest increase was in Washington State (up only 18 percent).
High foreclosure increases were also in Florida (143.5 percent); California (128 percent); Michigan (83 percent) and Arizona (82 percent), according to Default.
The company reported that along with high levels of subprime foreclosures, an increase in energy costs and slower home sales and interest rate adjustments are contributing to more and more homeowners losing homes.
Subprime loan holders in California have been particularly hard hit, according to "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners", released in December by the Center For Responsible Lending.
Among more than 400 metropolitan areas tracked in the center's study, the Top 14 metros with the greatest growth in subprime mortgage failures in 2006 were all in the Not-So-Golden State and included in the top five spots, No. 1, Santa Ana-Anaheim-Irvine; No. 2, Santa Barbara-Santa Maria; No. 3, San Diego-Carlsbad-San Marcos; No. 4, Santa Rosa-Petaluma; and No. 5, Napa.
"Most people obtained loans on stated income and negative amortization and now have no clue what to do since their payments are escalating, and they are not making any more money," said Susan Hillman, a San Diego County lender.
In and around Silicon Valley, San Francisco-San Mateo-Redwood City was No. 6, Oakland-Fremont-Hayward was No. 11, San Jose (Silicon Valley) came in at No. 13 and Santa Cruz-Watsonville was No. 12
"The losses will inevitably have ripple effects throughout the economy and our society as over two million families lose their physical shelter, their major source of financial security, and the social benefits of homeownership," according to the center's first-of-its-kind report on subprime casualties.
