'Who's Next' In Crumbling Home Loan Business?

Countrywide Financial missed its earnings target. "Countrywide's fourth-quarter earnings rose 73% from last year but missed estimates, as the company grappled with a tough secondary market for mortgages. Loan production had $102 million in pretax earnings in the quarter, down from $517 million a year ago. The decrease reflected a reduction in the profitability of mortgages and mortgage bonds sold in the secondary market." "'The primary cause of the decline was a lower gain on sale driven by front-end competitive pricing pressure and weaker secondary market conditions, as well as a 10-basis-point decrease in warehouse spread driven by a flattening yield curve. Normally, declining warehouse spreads caused by a flatter yield curve would likely be mitigated by an accompanying increase in gains on sale, but in the fourth quarter this was hindered by pricing pressure and weak secondary market conditions,' Countrywide said." "The company said its interest income for the quarter jumped 92% from year-earlier levels, but interest expense more than doubled." And the LA Times has this report on subprime lenders. "Ameriquest Mortgage Co.'s agreement last week to pay $325 million and reform its operations could turn out to be the first in a series of regulatory actions targeting mortgage companies specializing in credit-strapped borrowers. 'We're constantly talking about who is next,' said Chuck Cross, a leading investigator on behalf of 49 states and the District of Columbia in the case against Orange-based Ameriquest." "Federal Trade Commission officials confirmed that they have several open investigations of sub-prime companies but declined to provide details. Wall Street firm Bear, Stearns & Co. disclosed last month that its loan-servicing unit EMC Mortgage Corp., which collects bills and buys loans from sub-prime lenders, had handed over data and documents to the FTC. In a regulatory filing, Bear Stearns said the FTC was probing 'various unnamed sub-prime lenders, loan servicers and loan brokers' for possible violations of consumer protection laws." "Iowa Atty. Gen. Tom Miller suggested that it might soon be time to look at another part of the sub-prime industry, the so-called wholesale lenders that rely on independent mortgage brokers to generate loans for them. 'The retail side was clearly the more important place to focus,' he said. 'But at some point we want to take a look at the wholesale operations.'" "Kathleen Keest, a former assistant attorney general in Iowa, said, sub-prime lenders' aggressive marketing has persuaded many homeowners to refinance so frequently they have no equity left to tap or their incomes can't keep up with rising monthly payments. To overcome these impediments, she said, lenders have turned to shady tactics to keep the loans rolling in, not only exaggerating appraisals and borrowers' incomes but also pushing 'interest-only' mortgages and other products that disguise homeowners' less-than-flush finances. 'As long there's pressure to grow and the market's saturated, they'll do it whatever way they can,' Keest said. 'If they can't do it honestly, they'll do it dishonestly.'" "William Brennan, director of the Atlanta Legal Aid Society's Home Defense Program, says his office sees a stream of elderly widows whose Social Security incomes have been padded, on paper, by made-up jobs. And 55% of appraisers nationwide say they have been pressured to overstate home values, according to a 2003 survey." "Doug Duncan, the Mortgage Bankers Assn.'s chief economist, said that if large numbers of the loans were based on overstated home values or faked incomes, investors' profits would suffer and the investors would punish the offending lender by redirecting their capital toward other lenders. 'The market isn't perfect,' Duncan said. 'But it is efficient.'"