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Special Reports
Nonprime Lending
Nonprime Lenders Suffer in 3Q 2006
Conditions in B&C business are challenging.
By Brad Finkelstein
The third quarter was not kind to a trio of subprime mortgage lenders, with one
of the three firms, Saxon Capital Inc., taking a loss for the period of $26.4 million, or $0.53 per share.
The Glen Allen, Va.-based firm, structured as a real estate investment trust and in the process of being sold to
Morgan Stanley Mortgage Capital Inc., recorded third-quarter 2005 profits of $31.9 million, or $0.63 per share.
In a statement, Saxon said the factors contributing to the third quarter net loss were increased short-term interest
rates, continued price competition, an increase in delinquencies and a decrease in a part of the forward Libor
curve, which negatively affected its derivative valuations.
Third-quarter loan production at Saxon was $846.3 million, well behind the $920 million produced in the second
quarter but only slightly down from the $847.7 million originated in the third quarter 2005.
Irvine, Calif.-based New Century Financial Corp., another nonprime lender that has adopted a REIT structure, net
earnings to common stockholders was $63.5 million, or $1.14 per share, down substantially from the third quarter
2005's $117.5 million, or $2.10 per share.
In its statement, company president and chief executive Brad A. Morrice said, "Current conditions in our industry
are clearly challenging. In this context, while our $1.12 quarterly EPS reflects a year-over-year and sequential
decline, it is important to point out that a significant item negatively impacting our EPS was a $0.75 per share
reduction from marking-to-market our derivatives not qualifying for hedge accounting treatment. "Notwithstanding
the current quarter's impact, we believe our hedging strategies are effective on an economic basis."
For the quarter, New Century had volume of $15.8 billion, down 2.5% from the $16.2 billion originated in the second
quarter 2006 and 5.4% from the $16.7 billion originated in the third quarter 2005.
The company said it has initiated a pilot program to sell alt-A mortgage loans through its wholesale production
channel.
Higher loan repurchases and discounted mortgage loan sales reduced New Century's gain-on-sale margin by 48 basis
points.
It sold $410 million of nonprime loans during the third quarter at an average discount of 12.9% of outstanding
principal balance, compared with $415.1 million sold in the second quarter at an average discount of 5%.
Kevin M. Cloyd, president of New Century's secondary marketing unit, NC Capital Corp., said, "We expect the
volume of discounted loan sales and the severity of the discount to continue to challenge originators in this industry.
Loan buyers have become more vigilant, increasing the number of loan files reviewed in their due diligence process
and decreasing the percentage of loans they ultimately purchase. "In addition, loan repurchases have increased
as a result of higher early payment defaults. While we expect this industry trend to continue in the near term,
we believe our additional underwriting guidelines and continual focus on process improvement will help mitigate
this trend."
Accredited Home Lenders Holding Co., San Diego, had net income of $18.4 million, or $0.83 per share, well down
from third quarter 2005 net income of $41.3 million, or $1.87 per share.
James Konrath, chairman and chief executive, said the issues included pricing competition, product contraction,
higher delinquencies and losses, plus activities associated with the company's purchase of Aames Investment Corp.,
which closed on Oct. 1.
Accredited had third quarter loan volume of $4.2 billion, down 5.9% from the third quarter 2005's $4.5 billion.
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