Stan O'Neal's $1.3 billion mistake came home to roost this past week with the news that Merrill Lynch is closing its subprime wholesale division First Franklin. Its failure was not unexpected. In past columns we published exclusive comments from former account executives at First Franklin who said, among other things, "Merrill is starving us out." One told us that origination volumes were non-existent at the company, noting that the eight remaining co-workers at his office spent most of their days in the conference room "playing scrabble and Play Station on the conference projector screen to pass the time." It was a year ago that then Merrill CEO O'Neal signed a $1.3 billion check to buy First Franklin and two affiliates. Mr. O'Neal was forced out this past fall and walked away with severance and retirement benefits north of $130 million. Merrill had plans to originate Fannie Mae loans and promised its remaining AEs that they would be trained in GSE products but one AE told us "that training never happened." He also said many lenders refused to deal with Merrill "because of all the buyback requests forced upon them." Back in December this source predicted, "I think they're going to shut us down in January or by late February." He was right...
THIS JUST IN: An estimated 40% of outstanding subprime loans could go delinquent over the next three years, according to one industry expert. For the full story see Ted Cornwell's story in Monday's National Mortgage News. Don't subscribe? Call: (800) 221-1809...
The days of cheap credit for high LTV and low FICO score borrowers are over. Starting in June Freddie Mac will tag on an additional 30 basis point delivery fee for mortgages where the LTV is greater than 80% and the FICO below 740. That cost, presumably, will be passed on to borrowers. In my opinion it should be. Borrowers with riskier loans should pay more. As for Fannie Mae, they would not discuss their fees, referring a reporter to old bulletins published back in November and December. For the full story on g-fees, see the Monday edition of NMN...
More intelligence on investment bankers using contract underwriters Bohan and Clayton: "All the Wall Street firms used Clayton and Bohan, and maybe some smaller firms. They never looked at all loans, mostly a sampling, which was never greater than 10%, more like 2% to 5%. Only CitiFinancial, when I was at Argent, reviewed more than 10% of Argent and Ameriquest's loans, and it was usually around 50%." The source requested that his name not be used...
A "scratch and dent" executive told us recently that several Street firms, including Bear Stearns, Credit Suisse, Lehman Brothers and Morgan Stanley, are using the scratch-and-dent market to unload their nonperforming and subperforming loans...
In case you didn't know, GreenTree Servicing is still in business -- but only as a servicer. The firm's website boasts, "We service the nation's largest portfolio of manufactured housing loans, as well as home equity, home improvement and consumer installment loans." In the old says manufactured housing loans were called "trailer park loans" but that phrase only sparked images of pickup trucks and overweight Southerners frying bacon in front of a tin-can looking Airstream...
Last week, I asked readers to give their views on whether the subprime industry will comeback, and if so, what it might look like. Here are some of the responses:
* "The need for subprime hasn't changed or gone away and in fact the market need for products will grow. But when it does come back, it will more resemble the former alt-A type loan programs of yesteryear, rather than the hardcore subprime products that were prevalent up through early 2007. There won't be such products as 100% with a 580 score, nor will there be many stated-income programs, and probably no no-doc programs." -- Dan Fries.
* "How can it come back? It was known as 'hard money' in the past and it should have remained that way. I still find it hard to believe that no one has taken on the Fair Isaac system in this debacle. The total acceptance of FICO scoring is largely responsible for this mess." -- Elaine Roccio, mortgage banking consultant.
* "The necessitation of a subprime market for the credit challenged will be the force of its return. Success lies not within the excel models that drive the decisions to purchase but rather the return to fundamental underwriting along with strict adherence to guidelines and an overdue farewell to the lender exception." -- Christine Napolitano, former VP, Societe Generale.
Next week I will publish a few more...
Here comes the recession. The Commerce Department on Thursday reported that the gross domestic product increased at a scant 0.6% pace in the October-to-December quarter. (In the prior quarter, the reading was an eye-popping 4.9%.) Historically, when recessions strike, the Federal Reserve cuts rates (which they've been doing a little bit) but now they must balance those cuts against $102-a-barrel oil. High oil prices have been driving inflation. Does the Fed save the housing and mortgage markets and ignore oil prices? Stay tuned...
Thanks to the mean old Wall Street Journal and Sen. Chuck Schumer, D-N.Y., Countrywide Financial Corp. has cancelled its plans to reward its top correspondent lenders at a posh ski resort in Colorado. However, we're told that Countrywide did, in fact, hold its annual three-day "platinum producers" blowout in Florida. It's a good thing Sen. Schumer doesn't read this website otherwise he might raise a stink about it. While we're on the subject of Sen. Schumer: why hasn't he used his position as chairman of the Joint Economic Committee to hold any hearings on Wall Street's role in the subprime crisis? Must be all those donations he historically gets from the Street. According to OpenSecrets.org, the securities industry is his No. 1 donor...
STATE MORTGAGE NEWS: Maryland Gov. Martin O'Malley has introduced emergency regulations that require residential servicers licensed under the state's Mortgage Lender Law to provide loan-level information on their servicing portfolios to the Department of Labor, Licensing and Regulation on a monthly basis, beginning March 20 of this year. According to K&L Gates, the requirement will impact at least 130 or so servicers that do business in the state...
WASHINGTON NEWS: House and Senate Banking Committee leaders are close to an agreement on a Federal Housing Administration reform bill, and it could clear the way for final passage in a few weeks. "We had a very good meeting on the FHA bill," said House Financial Services Committee chairman Barney Frank, D-Mass. "I am very optimistic that we are going to get an FHA bill pretty soon." Rep. Frank said he agreed to drop a controversial provision in the House bill that would require the FHA to contribute excess revenue to an affordable housing trust fund. See Brian Collins' story in Monday's NMN. For more information, e-mail the reporter at
MUST-ATTEND MORTGAGE MEETINGS: SourceMedia will hold its second annual Mortgage Servicing Conference at the Westin Park Hotel in Dallas on April 17 and 18. The keynote speaker is Paul Bennett, chief economist for the New York Stock Exchange. For more information visit
SURVEY NOTICE: National Mortgage News is in the process of surveying residential and commercial lenders, servicers, and loan brokers for its annual Mortgage Industry Directory. To participate in the survey (1,000 industry movers and shakers see the book), send an e-mail to
DATA NOTICE: The Mortgage Industry Directory and the online version of the book are still available. (Mention this notice and receive a free Quarterly Data Report.) Besides listing detailed information on the top 400 lenders and 300 servicers in the U.S., the MID ranks the nation's top funders of commercial mortgages. There's also information on loan brokers. The book has valuable contact information on the top executives and department heads at each firm. For more information e-mail
