Downturn in housing sends Accredited's revenue south

The below article describes the secondary effects the slowing housing market has on lenders. If you need to sell your home or may be losing your home to foreclosure, you need to be careful if you are considering refinancing your equity to get cash and take care of bills and other debts. In many cases, it is better to sell the home and get a portion of the equity and no longer have to worry about the house, then it is to refinance and still have to worry about making house payments.

If you would like to receive an instant offer on your house, go to www.SDHomeSaver.com or email me directly at SDHomeSaver@gmail.com. Remember, I don't list homes, I buy them. I work hard to understand your unique situation and create an offer that meets your needs, and solves your situation. If you would like to understand more of your options on how best to sell your home, sign up for my free e-course. It offers excellent advice on how to pick the best realtor, sell your house as a FSBO, or how best to work with an investor to sell your house. Best of luck and I look forward to hearing from you.

By Mike Freeman
UNION-TRIBUNE STAFF WRITER

February 15, 2007

San Diego's Accredited Home Lenders posted a hefty fourth-quarter loss yesterday as the housing downturn continued to take a toll on lenders who specialize in mortgages for borrowers with blemished credit.

Accredited, the nation's 11th-largest subprime lender, lost $37.8 million for the quarter, or $1.49 per share. That compared with a $43.2 million profit a year earlier.

Revenue dropped 60 percent for the quarter to $59 million as the company boosted credit standards for borrowers and consequently lost business to competitors.

For the year, the company reported net income of $57.7 million, or $2.48 a share, down from $155 million, or $7.37 a share, in 2005.

This reversal of fortune is not limited to Accredited. The entire subprime industry has been trampled as more borrowers default on their loans and investors who buy mortgages become wary of purchasing subprime loans.

Last year, at least three subprime lenders collapsed into bankruptcy reorganization. Others have slashed their work forces. Last week, European banking giant HSBC, a big player in the U.S. subprime market, warned that it needs to set aside nearly $10.6 billion to cover loans that it expects won't be repaid. New Century Financial of Irvine, the nation's second-largest subprime lender, also warned investors that its loan portfolio was losing value as more borrowers missed payments.

Accredited has responded to the industry downturn by tightening standards for borrowers and boosting reserves for bad loans. Investors who purchase these loans in the secondary market require originators to buy them back if borrowers default.

“We have been making adjustments to the products we offer as well as processes and underwriting discipline,” said Joseph Lydon, Accredited's president and chief operating officer, in a conference call with analysts. “We recognize the market we're in, and we believe credit quality has to be the No. 1 priority.”

The question for the housing industry is whether the troubles in subprime lending will spill over into more conventional mortgages.

If they do, lenders could tighten credit standards for borrowers – requiring larger down payments, better credit scores or more income to qualify for loans.

And that could hurt not only first-time buyers but also people who recently purchased homes using hybrid adjustable rate mortgages with the idea of refinancing.

Hybrid ARMS offer a low teaser interest rate for a certain time – usually two or five years. Then the loans reset into full-fledged adjustable mortgages. The result often is a significant jump in monthly payments for borrowers.

Nationwide, between $1.1 trillion and $1.5 trillion in hybrid adjustable mortgages are scheduled to reset this year, according to the Mortgage Bankers Association.

With little or no price appreciation in the past year, it may prove difficult for these borrowers to refinance out of their hybrid loans if lenders boost credit standards.

For now, however, the problems in the mortgage business have been limited to the riskiest borrowers in the subprime industry, according to analysts.

“I don't foresee it spreading throughout the mortgage sector or the consumer credit sector as a whole,” said Robert Napoli, an analyst with Piper Jaffray who follows Accredited.

During the housing boom, scores of lenders entered the niche business of making loans to borrowers with tarnished credit. The increased competition for loans led to easy credit.

“There are only so many people in that market, said Lou Galuppo, director of residential real estate at the University of San Diego's Burnham-Moores Center for Real Estate. “The only way to enlarge the market is to drop the (credit) score.”

Today, more borrowers are missing payments on their loans or going into foreclosure. Defaults in California reached their highest levels in eight years during the fourth quarter, according to the DataQuick Information Services research firm. Lenders sent out notices of missed payments to 37,273 of the state's homeowners, a 145 percent increase from a year earlier.

It is unclear just how many of these homeowners are subprime borrowers. But the nonpartisan Center for Responsible Lending in Washington, D.C., issued a study in January that one in five subprime loans made in the past two years will end in foreclosure.

Richard Eckert of Roth Capital Partners of Newport Beach said Accredited's management has understood that the loose credit standards would not last. So while it relented and made loans to compete and keep its brokers from jumping to other lenders, the company is perhaps better prepared to deal with the current slump than other firms, he said.

Lydon, Accredited's president, said the company is hoping to see market improvement in the second half of the year as more companies abandon the subprime business.

“I just don't think there's a whole lot of room for anyone in the business to continue to book bad loans,” he said. “The buyers of the loans are putting them back fairly quickly” if they default.