Fed Study Finds 169 Mortgage Finance Companies Failed Last Year
By Craig Torres
Dec. 29 (Bloomberg) -- Federal Reserve researchers found that 169 independent mortgage companies ceased operations in 2007, crimping credit to consumers as the economy plunged into a recession.
The data signal the waning of lightly regulated mortgage lenders that thrived with funding from Wall Street firms and investors hungry for yield. Non-bank lenders’ share of the high- priced loan market, which includes subprime loans, fell to 20.5 percent in 2007 from 50.6 percent in 2004, the Fed study said.
Most of the non-bank lenders sold their home loans to investment banks which repackaged them into bonds. As the mortgages deteriorated in quality last year, buyers disappeared, leaving the finance companies holding souring loans. One of the largest non-bank lenders, New Century Financial Corp., based in Irvine, California, filed for bankruptcy last year.
“It underscores the whole vulnerability of a system that doesn’t have checks and balances in place at the beginning of loan origination,” said Kevin Petrasic, an attorney at Paul, Hastings, Janofsky & Walker in Washington and a former special counsel at the Office of Thrift Supervision.
Most of the financial institutions weren’t considered banks or banking subsidiaries so they were regulated by state banking supervisors rather than by federal agencies.
The 169 defunct lenders “accounted for nearly 15 percent of the higher-priced conventional first-line loans for site- built properties in 2006,” according to the final draft of the study published in the December Federal Reserve Bulletin. “They accounted for about 8 percent of all conventional first-lien loans for such properties.”
Banks’ share of the high-priced loan market rose to 46 percent last year from 26 percent in 2004, the data show. The banks’ market-share growth came as other firms disappeared and the overall market shrank. High-priced loan volumes fell 18 percent last year.
“If the subprime market continues to exist at all going forward, it will have to be done almost exclusively by federally insured depositary institutions in the near term, and perhaps eventually by non-depository lenders subject to rigorous state oversight,” Petrasic said.
Fed economists Robert Avery, Kenneth Brevoort, and Glenn Canner of the Board’s Research and Statistics Division also found that 74 percent of blacks who obtained mortgages from the 169 financial institutions received high-priced loans. Among Hispanics, 63 percent received high-priced loans, while among non-Hispanic whites the figure was 46 percent.
Consumer advocates have long said that lightly supervised lenders were giving unsuitable loans to minority borrowers. Regulators have cracked down on so-called predatory lending over the last year. The Fed, after goading by Congress, prohibited lenders from granting high-priced loans without verifying a borrower’s income and assets.
Global financial institutions have reported $1 trillion in credit losses and writedowns since the mortgage crisis began 16 months ago. Delinquencies on subprime mortgages, or home loans to borrowers with limited or poor credit histories, rose to 20 percent in the third quarter, according to Mortgage Bankers Association data.
The U.S. mortgage meltdown has led to a recession, as foreclosures blighted neighborhoods and reduced home values, further constraining credit.
Employers cut payrolls by 533,000 last month for a total loss this year of 1.9 million jobs. The decline more than erases the gain last year of 1.1 million.
The economy will decline at a 4.3 percent annual pace this quarter and at a 2.4 percent rate in the first three months of next year, according to the median estimate in a Bloomberg News survey of economists earlier this month.