Mortgage Lenders: The Pain Deepens
For the crippled mortgage industry, the bad news won't stop.
In August, mortgage lenders announced 30,892 job cuts, according to Challenger, Gray & Christmas (Challenger, Gray & Christmas), a firm that tracks layoff announcements. Speaking of the mortgage-fueled layoffs in the broader financial services industry, the firm's CEO, John Challenger, says, "We have not seen such a rapid descent since the airlines shed thousands of workers" in the wake of the September 11, 2001, terrorist attacks.
In September, the layoffs haven't slowed. A selection: Eight hundred more layoffs at National City Corp. (NCC), a Cleveland-based bank that cut 500 employees last month at its mortgage business. H&R Block (HRD) will cut 575 more workers at its Option One Mortgage unit. Lehman Brothers (LEH) will fire 850 workers, many at its Aurora Loan Services unit. IndyMac Bancorp (IMB) plans to cut 1,000 jobs, or 10% of its workforce.
Finally, Countrywide Financial Corp. (CFC), the nation's largest mortgage lender, plans to eliminate 10,000 to 12,000 workers, or about 20% of its headcount.
Yes, there are a few signs of hope for the industry. Many of the bigger mortgage companies have stabilized their financial positions as some of the weakest and riskiest players have gone under. A few of the big players have even hired up their defunct rivals' former employees. And, yes, an interest rate cut from the Federal Reserve, expected Sept. 18, might help somewhat.
But other news isn't pretty: On Sept. 13, Countrywide announced that its average daily application volume fell 12% in August, compared to both the previous month and a year ago. Total mortgage funding fell 17% from a year ago.
So what's reason for the layoffs and the drop in mortgage activity?
Major mortgage players have retreated from a large area of the market. Nontraditional loans, such as large "jumbo" mortgages or subprime loans to buyers with poor credit scores, have slowed way down.
If you are a traditional buyer, with good income and credit, "you will have no trouble getting a loan," says Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association Mortgage Bankers Association. In fact, interest rates on traditional fixed rate mortgages have actually fallen.
There's no problem here because federally chartered Fannie Mae (FNM) and Freddie Mac (FRE), using strict credit criteria, continue buying up those loans and re-selling them to investors.
However, investors refuse to buy riskier loans. So, lenders have had nowhere to unload subprime, jumbo, and other nontraditional mortgages. There's no sign that's easing, as secondary markets for riskier assets have been frozen since the middle of the summer.
So, Countrywide and other lenders have stopped originating many nontraditional loans. That's the main factor in the decline in Countrywide's mortgage activity, says Erin Swanson, an equities analyst at Morningstar (MORN). "It's a shift in focus," she says, accompanied by a tightening of lending standards. In August, 2006, 53% of Countrywide's loans were traditional fixed rate mortgages; one year later, 75% were fixed rate.
"Those [nontraditional] loans are being made, but at a much higher costs," says Nancy Vanden Houten, an economist at Stone & McCarthy Research Associates (Stone & McCarthy Research Associates).
A Federal Reserve cut in interest rates might help a bit, by lowering borrowing costs for homebuyers overall. But don't it expect to help riskier homebuyers re-enter the market or refinance. There is just too much worry by lenders and debt investors about credit quality.
"I don't feel that there is a quick fix for this problem," Vanden Houten says. "It's going to take quite some time for it to resolve itself."
The Mortgage Bankers Assn. expects mortgage originations to fall from $2.8 trillion in 2006 to $2.4 trillion this year. Next year, the slide should continue, to $2 trillion. Along with worries about credit risk and the freezing up of the credit markets, the mortgage industry is dealing with the oversupply of homes in many markets, Brinkmann says.
Problems of the housing market and the mortgage market actually can feed on themselves, analysts say. That could continue until either housing prices or interest rates get so low that many new buyers and borrowers are lured back into the market.
The one bright spot for the mortgage industry may be mortgages to non-residential buyers. Countrywide said commercial real estate funding volume was $757 million in August, up from just $273 million a year ago. "Commercial real estate has isolated itself from problems in the residential real estate market," Swanson says.