Subprime Mortgage Meltdown
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posted by Bob at Friday, March 09, 2007
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Friday, March 09, 2007
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SUBPRIME MORTGAGE MELTDOWN
Edina-based Maribella is the latest casualty in an industry hit by defaults, housing decline.
BY JENNIFER BJORHUS
Pioneer Press
At its peak Maribella Mortgage had 125 employees, operations in Chicago and Milwaukee and investors eager for the subprime mortgages it bundled together at $20 million to $50 million a pop.
Maribella's Edina headquarters are empty now but for three remaining employees. The company officially shuts down March 15, the latest casualty of escalating turmoil in the $1.36 trillion subprime mortgage market as rising defaults, weakening home prices and a get-tough approach by investors hammer the industry.
"I never thought it would get to this," said Mark Kiewiet, Maribella's executive vice president of operations, standing in his office earlier this week. "If we got through the fog, I figured we'd be fine."
"The whole industry has imploded," said Maribella co-founder Keith White.
White, 45, also owns Marketplace Home Mortgage, a large conventional lender located a few floors down from Maribella in the same building. White emphasized that Marketplace, as well as his construction lending company Marketline Construction Capital LLC, are unaffected by Maribella's predicament and doing fine. Marketplace is expanding.
Maribella, however, is the latest of at least two dozen subprime lenders around the country that have either closed, filed for bankruptcy, cut back or been acquired in the past few months.
Like Maribella, many were hit hard by a wave of investors, such as investment banks and pension funds, asking the companies to buy back bad loans that defaulted almost as soon as they were made. So far, the turmoil largely has been confined to subprime lenders, although defaults appear to be rising in so-called Alt-A mortgages, loans a notch above subprime but still below prime.
Industry critics say the meltdown was highly predictable after years of market excesses and lax underwriting. People were getting loans they simply never should have gotten, said Prentiss Cox, a former assistant attorney general who teaches law at the University of Minnesota.
"It's a tragedy and I'm sorry for the companies," Cox said. "But I feel particularly bad because it's a tragedy for the homeowners who were foreclosed on and the neighborhoods that are devastated, and for the uncertainty and fear it's caused, literally, in the global financial market."
White and other mortgage professionals say closures like Maribella's, along with tighter lending guidelines, mean lower-income people trying to buy homes will have a harder time finding a way to finance their purchase without bigger down payments. It also means that options are narrowing for people who are overextended in homes they've bought and are seeking to refinance. It's unclear how the risk, diffused because of how loans are sliced and diced for investors, will affect bondholders who invested in the pools of mortgages called mortgage-backed securities.
The meltdown has become so pronounced that tracking it has become a niche sport.
"The fault line is spreading," says Aaron Browne, the 27-year-old Atlanta blogger behind the Mortgage Lender Implode-O-Meter. Browne said he tracks moribund and ailing lenders just for kicks and not for shorting stocks.
No one knows how many of Minnesota's 3,500 licensed mortgage lenders and brokers have closed up shop, but Maribella appears to be the largest to fall locally. Maribella was a wholesaler. It didn't employ mortgage brokers or directly interact with buyers, but instead supplied brokers across the Upper Midwest with financing, bought loans from them and packaged them for investors.
Subprime lenders make higher interest-rate loans to borrowers who are considered higher risk either because of low credit scores, high debt burdens or other factors. The subprime industry barreled into action during the housing boom, offering a slew of mortgage products including 100 percent financing, adjustable rate mortgages with low teaser rates, and loans with little or no income documentation. Subprime loans are 13.56 percent of the $10.03 trillion U.S. mortgage market, or $1.36 trillion, according to the Mortgage Bankers Association. That's about 5.77 million mortgages.
As for Maribella, White said it was crushed by rising buyback requests that began in late 2005 and just got worse. People defaulting on loans early was the prime culprit, White said. Maribella maintained its warehouse line of credit for financing new loans with GMAC-RFC, a unit of Bloomington-based Residential Capital LLC that itself announced in January that it is cutting 800 jobs. That lending channel wasn't the problem, he said. Maribella simply couldn't handle all the requests to buy back loans.
When secondary market investors — investment banks, hedge funds or pension funds, for instance — buy bundles of home loans from originators, the deals include a buyback provision allowing them to request the originator repurchase loans if homeowners default within a certain time frame, typically 90 days. With defaults rising, investors have been enforcing such provisions.
Lenders forced to take back loans can go back to the mortgage broker responsible for them and try to refinance them. They also can try to sell them to scratch-and-dent loan buyers for anywhere from 50 to 90 percent of the original value.
White blames poor loan servicing by other companies for the early defaults on about half of the loans he was asked to buy back. Loan servicers are the companies people send their monthly mortgage checks to. White said that EMC Mortgage Corp., a Lewisville, Texas-based loan servicer owned by Bear Stearns, serviced many of Maribella's loans.
Problematic loan servicing is a legitimate issue in early payment defaults but hardly the only one, industry pros say. Since EMC is so large, there are bound to be occasional problems, said Roelof Slump, managing director for credit agency Fitch's Residential Mortgage group.
In Slump's view, aggressive loan origination is the main cause of people missing payments.
White said Maribella employees who bought home loans from mortgage brokers diligently checked documents for fraud. FBI agents trained his staff on fraud detection, White said. Nonetheless, people lied about incomes and inflated home values. He estimates that about 5 percent of his buybacks involved some kind of fraud.
"If there was fraud, we were a victim," he said.
As Maribella closes down, White's ongoing traditional mortgage business is adjusting to tightening lending standards across the board, not just for subprime loans. Marketplace will be fine, he said, because it is large and well established. But other small traditional prime lenders may go by the wayside as the restrictions shrink the pool of potential buyers, he said.
"A day doesn't go by that I don't get guideline restrictions from investors," White said. "Products are going away every single day."
Jennifer Bjorhus can be reached at jbjorhus@pioneerpress.com or 651-228-2146.
Minnesota cracks down on cozy ties between title firms, real estate agents
Commerce Department closes 35 joint ventures over illegal referral fees
BY JENNIFER BJORHUS
Pioneer Press
It's a common experience for home buyers: The real estate agent or broker, trying to be helpful, offers up the name of a title company he knows who can handle the closing.
In too many cases, though, the agent — and others — are breaking the law.
State regulators on Wednesday said they're cracking down on the widespread practice of real estate professionals steering customers to affiliated title companies and then accepting referral fees for the business. State and federal laws prohibit direct payments for simply referring a client to a title company.
"It's just plain illegal, and we're going to stop the practice," state Commerce Commissioner Glenn Wilson said.
Commerce Department officials released information on recent actions it's taken against title companies and said several more cases remain under investigation. In the largest action, the agency ordered Santa Ana, Calif.-based First American Title Insurance Co. to shut down 35 joint venture title companies in Minnesota and pay the state a $500,000 civil penalty.
First American's joint ventures were shams that violated state law and the federal Real Estate Settlement Procedures Act, or RESPA, Commerce officials said.
The action is the result of a yearlong investigation the Commerce Department has been conducting into title schemes, assisted by a U.S. Housing and Urban Development investigator. Several more actions will be taken in coming months, said Paul Hanson, chief examiner for Commerce.
Wilson said it's difficult to measure the harm to individual consumers. In Minnesota, title companies handle all the documents for closing a home purchase, and include a fee for title insurance to protect against errors in the title on a property. The fees title companies charge for closings range from $1,115 to $1,528 on a $250,000 house, according to a fee comparison provided by an independent title company in Minnetonka. Title insurance is major part of the fees.
First American agreed to the action, but it denied wrongdoing in its signed consent agreement. In a statement issued Wednesday, it said the arrangements were legal.
"Although First American believes it operated the joint ventures consistent with then-existing state and federal law, it recognizes that the regulatory landscape is changing and the company is adapting accordingly," the company said in the statement.
According to the consent order, signed Jan. 24, First American operated 35 title offices in Minnesota since 1995. First American had a 20 percent stake in the arrangements with the remaining 80 percent ownership held by 600 real estate agents, brokers, mortgage originators, land developers and builders who made initial investments of about $500 each.
The offices maintained nominal staff that were sometimes shared between companies. The group of real estate professionals steered customers to the title companies for closings and title insurance, and then received dividends, or kickbacks, for the business.
Hanson said the the kickbacks ranged from little to "tens of thousands" of dollars. It's unclear how many homeowners were involved in the deals, he said.
Among the 35 companies shut down are Diamond Title Services in Brooklyn Park, Pinnacle Title Services in Roseville, Residential Title Services in White Bear Lake and Title Specialists in St. Paul.
Hanson said it was more efficient to to shut down First American's joint ventures than to litigate and get First American to pay back consumers. First American also agreed to a number of educational programs, including writing a primer on title insurance for the Commerce Department's Web site and running education seminars for consumer and real estate groups.
Commerce officials took two other actions against affiliated business arrangements so far this year. On March 5 it fined American Residential Mortgage in Maplewood $5,000 for failing to disclose affiliated business arrangements with Titles Plus. And on the same day it fined Gibraltar Title Agency of Edina $10,000 and ordered it to shut down affiliated title companies Clear Title, Star Title, AM Title and Sound Title. In that case it ordered Gibraltar to pay restitution to customers totaling $100,000.
Doug Miller, president of Minnetonka-based Title One Inc. and a vocal critic of such title arrangements, praised the action. Consumers should know they can shop around for a title company and compare prices. The title affiliations are so widespread they're squeezing independent title companies such as his out of Minnesota's market, he said.
"They've preyed on the most vulnerable part of the real estate transaction for the consumer. It's title insurance. It's what they know the least about," Miller said.
The referral practice is coming under fire from other parties as well.
Last month two buyers in Minnesota filed a lawsuit in Hennepin County District Court against Edina-based Coldwell Banker Burnet, one of the area's top home sellers, accusing the company of violating its fiduciary duty to its customers by steering them to its affiliated company, Burnet Title. The lawsuit seeks class-action status for home buyers involved. The company wouldn't discuss the lawsuit.
Jennifer Bjorhus can be reached at jbjorhus@pioneerpress.com or 651-228-2146.
Title companies to be shut down
State regulators ordered Santa Ana, Calif.-based First American Title Insurance Co. to shut down these title companies it co-owned with real estate professionals in Minnesota:
Affinity Marketing Group, St. Cloud
Apex Title Services, Minnetonka
Cardinal Title Services, Minnetonka
Clearview Title Services, Maple Grove
Diamond Title Services, Brooklyn Park
Dominion Title Services, Forest Lake
Enterprise Title Services, Maple Grove
Federal Title Services, Minnetonka
Fortis Title Services, Chaska
Four Corners Title, Maple Grove
Glacier Title Services, Maple Grove
Gold Star Title Service, Maple Grove
Horizon Title Services, White Bear Lake
Imperial Title Services, Edina
Independence Title Services, St. Cloud
Lakeside Title Services, White Bear Lake
Marquis Title Services, St. Cloud
Mastery Title Services, Apple Valley
Monument Title Services, Minnetonka
Northern Lakes Title, Grand Rapids
Optitle Services, Minnetonka
Pinnacle Title Services, Roseville
Platinum Title Services, Minnetonka
Realty Home Services, Edina
Residential Title Services, White Bear Lake
Resource Title Services, Minneapolis
Skyline Title Services, Maple Grove
Title Associates, Roseville
Title Specialists, St. Paul
Total Title Services, Brooklyn Park
True Title Services, Maple Grove
Ultimate Title Services, Coon Rapids
Zenith Title Company, Duluth
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