Study: Plenty of Mortgage Lenders Still Vulnerable

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By Murray Coleman

RISMEDIA, August 27, 2007-(MarketWatch)-At least 22 of the country’s largest mortgage lenders that haven’t gone bankrupt are still engaged in risky underwriting practices, according to a new study by SMR Research Corp.

“These companies are in danger of credit losses on mortgages they’ve produced,” said Stu Feldstein, president of SMR Research, an independent financial-services market researcher based in Hackettstown, N.J.

The report looked at the 163 biggest mortgage lenders in the U.S. It broke underwriting data into six different areas. SMR Research compiled its numbers by building different databases of underwriting data.

County records across the country were included in the report. Another portion came from mortgage disclosures required by law from all mortgage lenders, whether they’re public or not, Feldstein said.

“The brokerage houses that over the past few years acquired subprime lenders still have high-risk loans,” he added.

Those include U.S. lending units of Barclays PLC, Bear Stearns Cos., American International Group and Lehman Brothers Holdings Inc.

“Mortgage lending isn’t the biggest part of these businesses,” Feldstein said. “So it’s unlikely that mortgage lending will cause their demise.”

He added: “The number of risky loans certainly still surpasses even several hundred million dollars. We’re talking in the billions [of dollars].”

Some 15% of all mortgage debt still outstanding has subprime characteristics, according to SMR’s estimate. That would amount to about $1.5 trillion in the U.S.

“Mortgages typically have 30-year terms,” Feldstein said. “So very little of that has come due at this point, since much of it was originated only in the past few years.”

But people have to make mortgage payments monthly. “So these risky loans are going to be a risk for lenders who produced them or the investors who now own them for years to come,” Feldstein said.

One lender that produced especially risky scores in the study included IndyMac Bancorp. So did Option One, a unit of H&R Block Inc., and Ameriquest.

“Each of these has very bad high-risk scores and aren’t well-diversified,” Feldstein added.

Several bigger lenders scored well, though. Names like Bank of America Corp. and Charles Schwab & Co. Inc. came out with very low risk ratings, he said.

So did E-Trade Financial Corp., which is now believed to be involved in merger talks with TD Ameritrade Holding Corp.

Better-than-average scores were accorded Wells Fargo & Co. and J.P. Morgan Chase & Co.

“They’re not only diversified but the loans they produced in their mortgage units were quite safe,” Feldstein said.

Murray Coleman is a reporter for MarketWatch in San Francisco

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