Though analysts are pointing to a number of different factors - be it run-ins with regulators, public relations nightmares, or disappointing economics - none deny that subprime mortgage shops are dropping like flies.

Already well below 1999 levels, issuance going forward in the home-equity sector is expected to be substantially curtailed, analysts say.

Most recently, within days each other, First Union announced it was planning to shut down its Sacramento-based The Money Store while New Century Financial put itself up for sale.

"I think this is a continuation of some of the tectonic shifts that the subprime market has experienced over the last few years," said Rod Dubitsky, an asset-backed analyst at Credit Suisse First Boston.

Just a few years back, the subprime market was distributed among many different lenders and issuers, Dubitsky explained, as competition in the market reached a peak.

"This was followed by a shakeout and consolidation in the hands of fewer, relatively stronger players," he added. "Now this consolidation is coming unglued."

Probably the most publicized instance of ungluing was Conseco Inc.'s decision to sell its ailing manufactured housing subsidiary, Conseco Finance (Green Tree), which the insurance company acquired for $6 billion in 1998.

Then in May, ContiFinancial Corp. filed for bankruptcy and sold off its multi-billion servicing platform to Fairbanks Capital Corp. The transfer received court approval last week.

Later, Advanta Corp. announced it plans to review strategic alternatives for its subprime mortgage banking business.

"It is amazing that it's all happening at the same time, and everyone's rushing for the exit," Dubitsky said. "But I think those who stick around are going to be rewarded, with a larger slice of a smaller but sweeter tasting pie."

First Union

Interestingly, First Union will continue servicing the subprime assets of The Money Store, most likely because it still has a stake in the residuals, though the bank sold off The Money Store's prime servicing platform to Wells Fargo, market sources said.

According to First Union's press release on the matter, First Union is also selling the First Union Mortgage Corp., and is seeking a buyer for its credit-card portfolio and servicing platform.

Though First Union is apparently streamlining many of its origination operations, the company says it plans to continue with the small business loan program, called Small Business Capital, which it acquired when it purchased The Money Store.

"The small business piece of it, also based in Sacramento, continues to be viable," said company spokeswoman Arati Sontakay. "Other decisions were difficult but they were the right ones to define our business model."

The announcement concerning The Money Store's mortgage operations raises questions as to why First Union decided to shut down the unit, as opposed to putting it up for sale.

Said one subprime analyst, "When you hear that First Union is closing down The Money Store, you want to say, This is one of the few big name franchises in the business, one of the largest, most recognizable names to the consumer. Is it not worth anything?'"

It could be a timing issue, the analyst said. "It's certainly not a good time to be in the market, with Conseco, now New Century, and everything else going on."

However, another source suggested that First Union's new management might be anxious to get any potential losses behind it sooner rather than later.

First Union's new Chief Executive Officer Kennedy Thompson replaced Ed Crutchfield in April, under whom The Money Store acquisition was completed.

"The new guy is in a position where if he lets The Money Store hang on, and two years from now it turns out to be a continuing loser, two years from now it would be his problem," the source said. "If he cuts it and takes a big loss now, he's making the decision that needs to be made but the loss is attributable to his predecessor."

Market Valuation

The First Union/Money Store consolidation was typical of others that have happened in the subprime market over the last few years, where a banking entity absorbs a specialty finance company.

Owen Carney, president of Bank Capital Markets Consulting, suggested that the sheer difference in the way banks and specialty finance companies do business might have led to some of the problems these merged entities are currently facing.

"What a lot of people lose sight of in this area is that there's no standard definitions with specialty finance companies," Carney said. "There's no standard definition of delinquency. There's no standard definition of loss, particularly when you compare banking and finance companies. Those are two entirely different worlds."

Other market watchers are pointing to the value of the mortgage operations in terms of the stock market.

"I think with Advanta, that was their issue," a source said. "I think Advanta had stated that they're subprime lending was relatively profitable, but it was the stock market valuation they were addressing."

Regardless, the current industry issues, such as predatory lending and image-related matters, are driving down the market value of subprime mortgage operations and squeezing the liquidity out the of the packaged loans. Further, regulatory tightening is making it more difficult for subprime lenders to securitize their loans, sources say.

"There's clearly going to be some concern on the part of investors about the developments in the industry," CSFB's Dubitsky said. "But I think that there's real opportunity out there for those who have the patience to understand the story, both on the investor side as well as any new originators/issuers in the market. Clearly the rationalization of the industry is still continuing, but I think we're nearing the end of the process." -

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