Privately held ACC Capital Holdings, the parent company of Ameriquest Mortgage Co., last week announced the closure of 229 retail branches, resulting in job loss for roughly 3,800 of its employees - representing about 70% of its retail staff. The move constitutes the third round of layoffs at the company since November.
Ameriquest, the nation's largest subprime mortgage lender, is expected to continue meeting with rating agencies this week. Rating agencies and the market are trying to determine the implications - both for the originator's financial wellbeing and its servicing capabilities - of its decision to shut down nearly all of its retail origination branches.
The announcement comes as subprime lenders are fighting to make money amid an environment of lower origination volumes and mortgage rates that have trailed the federal funds borrowing rate, causing a crunch in the lenders' profit margins.
While subprime origination volume in 1Q06 was the second-largest first quarter on record, according to RBS Greenwich Capital, half a dozen lenders posted declining origination volumes year-over-year. Ameriquest led the drop, with its originations falling 53%, followed by National City, which posted a 37% decline, and General Motors Acceptance Corp., which experienced a 28% decline.
Add into the mix increased regulatory and investor scrutiny of such volume-spurring loan products as the interest-only, option adjustable-rate mortgage and 40-year loan. This combination, a number of market participants say, is bound to be affecting a number of subprime lenders - and quite possibly, the quality of the loans they are originating. "Most [lenders] you will talk to will be beginning to whack their bottom line," predicted Charles Freeman, chief credit officer at HomeBanc Corp., at an industry conference earlier this year. Freeman said cutbacks in office staff could result in a higher burden of such tasks as information verification - such as borrower income and employment - on fewer employees. (ASR, 02/13/06)
Irwin Financial Corp. last month announced it would cut some 23% of its home equity business line's retail channel, which includes nonconforming mortgages, in order to "return to acceptable levels of profitability." Similarly, Washington Mutual and Aames Investment Corp. have also cut staff. Orange, Calif.-based Acoustic Home Loans ceased its subprime lending business last month, citing "tightening market conditions within the subprime lending arena."
Top executives of subprime lending companies, perhaps most prominently Countrywide Financial Corp.'s Angelo Mozilo, have called one another out for keeping mortgage interest rates low, characterizing the volume-clenching decisions as "irresponsible" and "unsustainable." But while Ameriquest's cost to originate is below 2%, the lender is aiming to cut that number further in order to keep rates competitive. According to Peter DiMartino, RBS Greenwich's head of ABS and mortgage credit strategy, the lender's funding strategy shouldn't change - but a continued drop in origination volume is likely to lead to less securitization activity.
Some investors continue to balk at the unrewarding risk premium currently offered in the subprime home equity space. "Bonds are extremely competitive and spreads are tightening," said one home equity ABS investor. "Investors are so hungry for yield." He added that new entrants to the market are purchasing residuals and that scratch and dent spreads are "very close" to performing like subprime spreads.
Theoretically, less volume could continue to sustain the historically tight spreads within the cash home equity ABS sector, although a substantial shift in subprime loan performance data could be enough to sober up investors, some analysts say.
JPMorgan Securities analysts last week wrote that, "we are at or at least near a significant turning point in the HEL ABS market, wherein spread widening due to rising credit risk becomes more likely." While the bank's researchers noted that the sector's relatively cheap status compared to other sectors still contributed to its value, they anticipated moving to an underweight recommendation in the "not too distant future." Deutsche Bank analysts last week recommended investors purchase higher-rated securities in the subprime arena, as the price of fuel rises and housing growth slows.
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