Were reports of the subprime mortgage industry’s demise premature?
At least for some that seems to be the case.
The two largest lenders to borrowers with imperfect credit are talking boldly about having adjusted to the sector’s new reality of rising interest rates, tighter profits and cutthroat competition.
“This is a transition year,” said Robert Cole, chief executive of Irvine-based New Century Financial Corp., the nation’s No. 2 subprime lender, at an analyst meeting last month. “Those companies that can’t adjust costs, that can’t raise the coupon, are troubled. They may fall by the wayside, change corporate status or be acquired.”
Just a few months ago, New Century’s shares were in a free fall as rising interest rates squeezed the company and its competitors.
Interest rate hikes by the Federal Reserve have pushed up payments New Century and others have to make to buyers of their mortgages packaged as bonds. That’s eaten into profits as interest income from mortgages hasn’t kept pace.
But things don’t seem so bleak of late. New Century’s shares are up about 25% so far this year. The company counted a market value of $2.6 billion last week.
In February, New Century reported big gains in loans, profits and interest income for the fourth quarter. A key driver: higher interest rates charged to borrowers.
Then last week, New Century reported doing $13.4 billion in loans for the first quarter, a 31% increase from the first three months of 2005.
Projections had called for a “meaningful” rise in loan volume for March and a strong April, said Cole, who is handing over chief executive duties to cofounder and President Brad Morrice in July.
Details on Orange-based Ameriquest Mortgage and its sister companies,which combined make up the nation’s largest subprime lender,aren’t as easy to come by.
The privately held company holds its cards close to the vest. Like New Century, Ameriquest has cut costs and made other tweaks.
“This is a cyclical industry,” said Adam Bass, Ameriquest vice chairman and senior vice president. “What you are seeing now, and what you will continue to see, is a range of strategies by lenders to address the current cycle.”
Part of New Century’s recent gain could have come from Ameriquest.
New Century did $15.7 billion in loans in the fourth quarter, up 37%, according to industry publication Home Equity Wire. Ameriquest did $15 billion, down 17% from a year earlier.
Ameriquest has gone after more loans to borrowers with solid credit and likely has given up some ground in subprime loans.
For 2005, Ameriquest did $73 billion in loans, versus $56 billion at New Century.
Last year’s sell-off of New Century,the largest publicly traded subprime lender and a proxy for the industry,was premature, according to one analyst.
Ameriquest and New Century are “the largest companies of their kind in the industry,” said James Fowler of San Francisco-based JMP Securities LLC, which follows New Century. “Until they show that they have a (material operating) deficiency, we should be giving them the benefit of the doubt.”
Not everyone’s sold.
New York-based Standard & Poor’s Ratings Services last month cut its outlook on New Century from stable to negative.
The revision was based on concerns about “deterioration in profitability metrics that began to emerge in the last two quarters of 2005 as a result of industrywide developments,” S & P; analyst Anne Cosgrove said.
S & P; noted New Century’s upswing this year but said the risk of slipping profits remains with rising interest rates and only subtle increases in mortgage rates.
“Standard & Poor’s can envision a scenario in which credit costs could rise at the same time the company is struggling to maintain production volumes, preventing any recovery in profitability metrics,” Cosgrove said.
Profit Slip
Last year, New Century sought to do more loans, even at the expense of profits.
That plan hit its peak in August, when a record $6 billion in loans were made, but at a year-low profit margin of about 2.7%. That’s when the company’s shares started falling.
The strategy follows that of Ameriquest, which has looked to grow through the sector’s downturn by snaring borrowers from rivals and living with less profit.
That led Angelo Mozilo, chief executive of Calabasas-based Countrywide Financial Corp., the nation’s largest mortgage lender, to call Ameriquest and New Century “irresponsible players.”
New Century since has tweaked its approach.
“In August and September, we revisited that strategy and said we’re going to be more selective (about) the product, the volume, and the margin that we originate,” Cole said.
The average rate New Century charges to borrowers was 8.5% in February, up from 7.2% in August.
The company has continued to cut expenses, which dropped about 16% from the third quarter to the fourth.
