One question some of you might be asking is this: if subprime volumes have screeched to a halt, what are all those traders on Wall Street doing? Good question. We're told that come January there will be a wholesale shakeup at several firms. Sources tell us that Deutsche Bank, Lehman Brothers and Merrill Lynch all are conducting reviews (or soon will) of their entire mortgage operations. As for where the most drastic changes might occur, Merrill Lynch might be a good bet. An account executive there told us recently about conditions at Merrill's First Franklin Financial Corp. He said many offices are not funding loans while awaiting training for Fannie Mae products. "So far, there's been no training," he told us. The AE, requesting his name not be used, painted a bleak picture, saying business is so slow that employees pass the day playing Scrabble and PlayStation on the conference room projector screen. He said FFFC AEs and executives keep asking Merrill why they can't just originate loans and put them on the balance sheet of Merrill's FDIC-insured bank. "We're not getting any answers," he said. For the full story see the Monday edition of National Mortgage News. If you don't subscribe call (800) 221-1809...
Seen driving around Southern California recently in a Mercedes Benz: Brad Morrice, former New Century Financial Corp. president and CEO. Our source estimated that the car costs about $150K. In the passenger seat: a 100-pound dog, its tongue wagging in the breeze. Once the nation's top subprime wholesaler, New Century crashed and burned this past spring, filing for bankruptcy protection...
THE LAST WORD OF THE YEAR: Mortgage executives, financial analysts, politicians, consumer advocates and journalists -- to name but a few -- are now analyzing just what went wrong in subprimeland. Readers of National Mortgage News and our affiliates already know the answer to the blame-game question of "Who did it?" Mortgage bankers, brokers, Wall Street financiers, appraisers, underwriters, rating agencies, and yes, consumers, all played a starring role. Back in mid-1999 I wrote an analytical piece for the Mortgage Industry Directory, summarizing the meltdown in the subprime market. This earlier "correction" began in the summer of 1998. As industry veterans well know, the current subprime crisis is not the industry's first. Far from it. Here's an excerpt from what I wrote:
It was sometime in mid-August 1998 when I received a telephone call from Dan Phillips of FirstPlus Financial, Dallas, the market leader in high loan-to-value ratio lending. For most of 1997 and part of 1998, Dan's firm had been on fire, blowing away earnings projections and seeing its stock go through the roof.
FirstPlus -- it appeared -- was a virtual money machine. Not only was it the market leader in high LTV lending (its chief TV pitchman was Miami Dolphin star quarterback Dan Marino) but it was making inroads in the subprime market and was gobbling up smaller firms left and right, thanks to the lofty price of its stock which had hit an all-time high in 1997 ($62 a share.)
At one time Mr. Phillips bragged to analysts that his company was so good at what it did that he wouldn't sell out, not at even $100 a share. He also bragged that his borrowers had better credit (FICO scores) than Fannie Mae's, the conventional secondary giant.
By now, the word was out in the mortgage industry that subprime and high LTV lending/servicing were higher-margin products/services and anyone not involved in these niches were missing out on a great opportunity. Traditional "A" lender after "A" lender (Countrywide, Norwest, AccuBanc, RBMG, to name a few) were rapidly moving into the subprime arena as a way to diversify profits away from the low-margin "A" business.
But when Dan called in August of 1998, he had a bit of panic in his voice. FirstPlus shares had been on a steady decline since April when they peaked out (for the year) at $50. It seemed, to Mr. Phillips, the slide in FP's shares was never ending. "What's going on in the bond market?" Mr. Phillips asked. "It's gone wacky." Indeed, the bond market was beginning to go on the fritz. In late August there were rumblings that Russia was about to default on its debt and the carefree attitude that investors had been taking for three years was about to end...
Yes, there has been blood in the streets of subprimeland. But it now appears that the winners and dominant players in the industry will be firms that are cash rich, or can put these high-yielding loans on their balance sheet (again, banks and thrifts). But it also means that the "go-go" years of 1994 to 1997 are long over for this industry and that means sober pricing is here to stay: no more over-paying to third-party loan brokers for production, no more gain-on-sale craziness, no more Wall Street puppeteering. Oh, but will it last?"
