Is Wall Street Delirious with Subprime Fever?
By now it's old news that Merrill Lynch is coughing up $1.3 billion for subprime giant First Franklin Financial Corp. and two affiliates. In total, about five Street firms were vying for FFFC with Goldman and Deutsche considered to be the runner-ups in the bidding war.
And by now it's no secret that Wall Street loves not only the business of lending money to subprime lenders and securitizing their production, but now they apparently love the business of making home mortgages to credit-impaired consumers. Love, love, love.
And to this I have to say the following: Hey, Wall Street, have you lost your collective mind? I'm not just talking to Merrill Lynch. I'm talking to Morgan Stanley, which is buying Saxon Capital, to Deutsche, which is buying Chapel Funding, and to the buyer of Impac Holdings, which likely will be an investment banking firm as well, that is, if Impac actually decides to sell.
Yes, it's a wild and crazy time in mortgage land. Production volumes are beginning to creep down and could truly turn ugly in the fourth quarter. Home prices are headed south and show no signs of improving anytime soon. In a recent interview, Countrywide CEO Angelo Mozilo, an industry sage for sure, repeated his belief that mortgage banking, and housing in general, are headed for a hard landing.
So, why then are firms like Merrill and Morgan paying good money for subprime lender/servicers? As one former managing director told me: "I guess Wall Street is smarter than me."
But who knows, maybe the Street knows what it's doing. I have a general perception about Wall Street and it goes like this: As soon as a crack appears in the facade, they head for the exit. Will the Street bolt the mortgage lending industry when the "downturn" comes?
Based on the Merrill and Morgan deals, the answer to that question is no. The downturn has already begun and it would appear that the Street might actually be doubling down on its bet in mortgageland, that is, nonconforming mortgageland.
For its $1.3 billion, Merrill is getting $44.2 billion in subprime servicing rights and a lender that is on track to fund $24 billion this year. (As a technical matter, Merrill is buying not only FFFC, but its servicing affiliate and a direct-to-consumer lender called NationsPoint.)
Don't get me wrong. FFFC has a good reputation in the industry and is quite profitable. In the second quarter the lender earned $148 million while NatCity's "A" paper business lost $52 million which begs the question: why isn't the bank selling the "A" paper unit and keeping FFFC?
Traditionally, "A" paper margins are razor thin while subprime margins are fat, fat, fat. Then again, the market has been turned on its head the past year with "A" margins widening and subprime suffering. But who knows? There's a lot of fog out there right now and the tealeaves are getting harder to read.
By purchasing firms like FFFC and Saxon, Wall Street is signaling that it has no problem funding mortgages directly to consumers. Yes, I know that FFFC and Saxon are wholesale shops, but in my book table-funding is really a direct-to-consumer transaction.
The last thing in the world a Wall Street firm wants is to open up a retail branch in a shopping center so they can make hard-money loans to folks in muddy pickup trucks and minorities who can't get a decent rate elsewhere.
At least, that's my perception. In the good old days, when life made more sense, Wall Street firms only catered to rich folks they could peddle stocks to. I guess times are changing. Who knows, maybe Merrill will change the name of FFFC to Merrill Lynch Home Equity. Go ahead, Merrill, I dare you.
Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.Muolo