| Drop in Refi’s to Impact Subprime Lenders
Subprime lenders see new surge August 29, 2003 By NEIL J. MORSE |
| Common wisdom holds that mortgage rate changes affect conventional and subprime lenders exactly opposite. When rates drop, the A lenders are in the catbird seat — when they rise, the B/C crowd rides high. Or, so it has seemed.
That is, until this most recent origination surge when rates kept falling so often and so much that they hit lows not seen in decades. Everyone did well. So what happens now, as rates trend upward? Will conventional wisdom prevail or will new truisms emerge? “By design, we were not dependent on the ‘refi mania’ of the last few years,” reports James Konrath, chairman and CEO of Accredited Home Lenders, Inc., a subprime lender in San Diego. “Some shops have lived off of it,” he notes, refinancing the same customers three and four times over the past 18 months. As a result, Accredited does not expect a sea change as rates rise. The company’s product portfolio this year has been comprised of 37% purchase mortgages and 54% debt consolidation loans, with cashout accounting for the rest. Through June of this year, Accredited closed a total of $3.375 billion in loans, up an astounding 99% over the same period last year. Konrath expects the second half of 2003 to be comparatively weaker, only because the second six months of 2002 were so strong. Mike Sawyer, chief executive officer, Saxon Capital Inc., Glen Allen, Va., thinks subprime lenders are in the early stages of an 18-month period of robust performance. Saxon, which had a second-quarter 2003 net income of $15.4 million (three times a year earlier), does not offer rate/term refinancing, says Sawyer. More than half its business comes from brokers and correspondents “who will now start paying attention to the under-served market,” which he describes as the “typical A-, cashout refi, non-conforming borrower.” Saxon is a “little guy” in the subprime arena, according to Sawyer, with only 1.5% of total market share. Compare that with New Century Financial Corp., Irvine, Calif., which flies near the top of the flock with reported second-quarter earnings of $60.8 million this year, 42% above the same quarter in 2002. New Century is venturing more into purchase mortgage market, where it has not been very active in the past, says Brad A. Morrice, vice chairman, president and chief operating officer. He reports that about a third of New Century’s current production is purchase mortgages, with rate/term refinancing representing less than 15%. The remaining half is refi’s — either cashouts or refi’s where a borrower pays off consumer debt. Rising rates are not of much concern, according to Morrice, because “a lot of nonprime borrowers are turning consumer debt into mortgage debt and that continues to make sense.” Other subprime lenders reporting big revenue jumps in the last quarter are: NovaStar Financial Inc., Kansas City, Mo., which had net earnings of $23.1 million, 122% over the second quarter last year; and Delta Financial Corp., Woodbury, N.Y., with net income of $11.7 million — a 193% jump. Helping to juice revenues for subprime lenders has been all the money flowing into subprime securitizations. Secondary market purchases of “Alt-A (alternative A),” loans, high-LTV loans, home equity lines of credit, “scratch and dent loans,” and other non-conforming products totaled $160 billion last year, according to CS First Boston (CSFB). That was 77% higher than 2001. This year, activity is expected to rise modestly to about $165 billion, the firm reports. CFSB led the securitizing pack in ’02 with $9.6 billion in subprime loan transactions, followed by Lehman Bros. with $9.5 billion and Morgan Stanley with $8.7 billion. Forecasts of MBS (mortgage-backed securities) issuance in 2003 are for lower numbers than 2002’s record-breaking highs, according to Standard & Poor’s, which calculates that they will remain relatively strong as subprime and second-lien volumes partially offset moderating refinancing in conforming loans. New Century’s Brad Morrice says the trend over the past several years has been toward a concentration of market share among top subprime lenders and he expects a continuation with rising rates “probably playing into that trend.” In these times, the executive continues: “Loan volume holds up but value on the secondary market goes down, so a little bit of margin pressure develops.” The companies with lower origination costs find themselves better equipped to deal with the ensuing, lower margins. “It’s the big guys who usually have the lower costs,” Morrice adds. Saxon’s Sawyer is upbeat. “There are still a lot of customers for us to make good loans to,” he declares, noting that his company is a portfolio lender and, as such, “we will have lot of cash when some of our competitors suffer crunches.” Precisely what will transpire in the next quarter or year remains to be seen but New Century’s Brad Morrice says he would be most surprised if rates did not hold steady or continue trending upward. He hedges that bet, though, noting that, “usually the consensus is wrong.” So his best advice is advanced in two words: “Be nimble.” |
|
Neil J. Morse is a communications consultant and independent writer working exclusively in the mortgage finance industry. He resides in Newtown, Conn. and may be reached by e-mail at: morse@ntplx.net |
