Subprime Mess Continues To Wreak Havoc on the Mortgage Market

Mortgage News Daily received a tip from a reader over the weekend that yet another mortgage lender has expired.

United Pacific Mortgage (UPM), headquartered in Woodland Hills, California, is rumored to have shut its doors, laying off its 95 employees on Friday. According to Hoovers, a Dow Jones Company, UPM is privately held and participated with 100 lenders. Its sister firm, Mandalay Mortgage, announced in January that, due to heavy losses in the subprime mortgage market, it would no longer be accepting loan applications. It is apparently losses from Mandalay's loans that are forcing UPM to close.

We attempted to verify the situation at UPM on Monday but calls to both its corporate and consumer telephone numbers were not answered and direct phone numbers to employees all defaulted to voice mail.

The information we received said that Countrywide Mortgage will be "absorbing" the production team. Again we attempted to verify this with Countrywide but their media office appeared to know nothing about it and at this hour we are still awaiting information from higher rungs on the corporate ladder.

But it is possible that Countrywide has been just a little busy. According to Greg Morcroft, writing for MarketWatch the company on Tuesday reported a 33 percent drop in net income for the second quarter and announced that payments were delinquent on nearly 24 percent of its subprime mortgage loans compared to 15.33 percent at the same time in 2006. More disquieting, there is evidence that problems in the company's subprime sector appear to have spread to their higher rated prime loans, specifically home equity products on which 4.56 percent of customers were behind in payments compared to 1.77 percent during the same period last year.

Countrywide's net income for the quarter fell to $485 million or 0.81 per share from $722 million or $1.15 a share one year ago. Furthermore the company's subprime loan production was off by 50 percent and it cut earnings estimate to $2.70 to $3.30 per share from an earlier estimate of $3.50 to $4.30.

Another lender is still alive but retrenching. Indymac Bank announced late last week that they were laying off 400 employees, approximately 4 percent of its 9,600 person workforce. The layoffs are primarily in the operations and process and technology groups and are spread across various offices around the country.

Indymac's CEO, Mike Perry in an email sent to all employees said that the mortgage market continues to be very tough. Indymac's dollar loan volume was down 12% in the second quarter compared to the first quarter and loan units were down by 17% because the company has eliminated the 80/20 piggyback product in favor of higher-LTV programs with mortgage insurance. "While recently our pipeline has been recovering, we concluded that we needed to both "right-size" our workforce to our current volumes and also be very "hardnosed" in redesigning our processes in our drive to become "the" low cost provider in the mortgage industry, while at the same time ensuring that we maintain our high standards for customer service and credit quality. Recent advances in our technology are enabling us to be more productive and efficient, and we simply must reap the cost savings associated with these advances and pass them on to our customers in order to be competitive in the market."

In an email a few days before the layoff notification, Perry said: "... delinquencies in our $184 billion servicing portfolio increased in the second quarter of 2007... 30+ day delinquencies were 5.35 percent, up from 4.10 percent a year ago and 4.37 percent last quarter. Foreclosures also increased to 1.15 percent in the second quarter, up from 0.89 percent in the prior quarter.

"While our delinquency rates have increased, they are comparable to Countrywide Financial Corp., which was ranked by the National Mortgage News as the No. 1 residential mortgage originator and the No. 2 residential servicer in the U.S. for the first quarter of 2007. On July 16, 2007, Countrywide reported a 30+ day delinquency rate in their servicing portfolio of 4.77 percent for the period ending June 30, 2007. Indymac's modestly higher delinquency rate can be attributed to the fact that Countrywide carries a much higher mix of agency/conforming loans in their servicing portfolio relative to Indymac."

Perry refuted claims that the quality of Indymac's loans is just a notch above subprime saying that prime first lien loans, including those sold in Alt-A securitizations, account for 93 percent of Indymac's servicing portfolio and the delinquency rate on these loans was 4.69 percent for the second quarter of 2007. The delinquency rate on our subprime loans, which account for three percent of our servicing portfolio, was 22.5 percent, a rate consistent with industry subprime trends and not materially above where it was a year ago. This clearly demonstrates that the vast majority of our loans are of significantly higher credit quality than subprime loans-by a very wide margin.

Indymac will be taking a pre-tax charge to earnings of approximately $6.5 million in the third quarter, most of which is severance for laid-off employees. Perry said the cost savings will more than offset this charge during the second half of this year, and on an ongoing basis the company projects $30 million in annual cost savings.

The company was founded in the late 1980s as a semi-spin-off of Countrywide Mortgage. In 2000 the now independent company acquired a depository institution and from there became the largest savings and loan in Los Angeles. It is currently the 7th largest savings and loan and the 2nd largest independent mortgage lender in the country.