ith radio ads still pitching potential borrowers, Wesley Hoaglund, owner of Lenox Financial Mortgage Corp. in Irvine, is hoping to survive a market where the number of home loans being made is about half of what it was a year ago.
“We’re hoping to make it through the storm,” Hoaglund said.
Mortgage brokers,middlemen who generate loans funded by banks and other financiers,have seen a big chunk of their business go away in the past year. Some wonder if they’ll survive the downturn.
Subprime and Alt-A loans to borrowers with poor or imperfect credit? All but gone. Jumbo loans worth more than $417,000? A fraction of what they used to be.
What’s left for mortgage brokers largely are vanilla loans,mortgages of less than $417,000 to borrowers with good credit. They’re known as “conforming loans” because they meet guidelines set by the government-backed funds of Fannie Mae and Freddie Mac.
But conforming loans are the least profitable for brokers, prompting some to wonder if they can generate enough in fees to cover their costs.
The mortgage brokering business, which just a year ago was chirping with ads everywhere from billboards to annoying phone calls, has gone cold.
Demand Still There
Brokers say it’s not for lack of demand for subprime, jumbo and other loans. Earlier this month, mortgage applications surged to a four-year high on lowered interest rates, according to the Washington, D.C.-based Mortgage Bankers Association.
But lenders’ appetite for loans has dried up, brokers say, as banks and others see losses from risky mortgages made during the boom.
And things are likely to get worse before they get better. Bad subprime loans are forecast to plague lenders with defaults through 2008.
That has economists expecting more job losses for mortgage brokers. No one knows for sure how many people work as mortgage brokers locally, though the county has been a hub for the business.
Last year, 135,780 people here worked in the finance sector, which includes mortgage brokers. This year, that’s expected to be down 2%, or by about 3,000 jobs, with mortgage brokers presumed to lead the drop, according to Chapman University economist Esmael Adibi.
The finance sector’s recent peak was at 139,000 jobs in 2006.
Loans at Lenox are down 60% from a year earlier, according to Hoaglund.
And subprime loans that once made up about a quarter of his business have stalled to practically none, he said.
He’s cut his staff by about 40% to less than 100 workers. Hoaglund also has cut his advertising budget in half.
Started Himself
Eight years ago, Hoaglund said he started Lenox by himself from a 10-foot by 10-foot office.
Lenox grew with a rising tide in mortgages, expanding its business to 35 states. Hoaglund said he hopes his geographic diversity will help keep the business alive.
The company lines up loans for banks and also does some lending itself. That makes foreclosures an issue for Lenox, he said.
Lenox hasn’t seen many foreclosures, Hoaglund said. But it recently foreclosed on a Moreno Valley home for which the borrower didn’t even make the first payment, he said.
The house that initially sold for $460,000 has been declining in value and was last listed at $250,000, he said.
After paying real estate agent fees, the house could bring a loss of about $150,000, he said.
Like Hoaglund, mortgage broker Jim Walter had about a quarter of his business from people with less than great credit.
Walter, a 25-year veteran of the business, said he sees the credit collapse as a badly needed cleansing of brokers who helped fuel the mortgage bubble.
“I’m glad we’re getting rid of a lot of riffraff,” said Walter, who runs Anaheim’s Mortgage Plan.
His office building once housed two other mortgage businesses that recently went under, Walter said.
There’s still a lot of demand from borrowers but lenders have become ultra-conservative, he said.
“It’s not an issue of not enough clients,” Walter said.
Walter still does subprime loans. But they’re merely 5% of his business and only made to people willing to put their own money into a home, he said.
The Federal Housing Authority now requires borrowers to put up at least 5% of a loan’s value, according to Walter.
About 40% of Walter’s business now comes from loans for commercial real estate, which is feared to be the next area to see a downturn.
Through the years, the mortgage business became complicated with elaborate deals involving low teaser rates and other creative financing, according to Walter. A combination of cheap money and greedy brokers led to unqualified people getting loans, he said.
“When I first started in the business it was simpler and stable,” he said. “It was harder to get a loan.”
Simpler Days
The business now is reverting back to its simpler days, according to Walter.
Mortgage Plan didn’t make loans for more than the value of a house, as some other brokers did, Walter said.
It still does some stated income loans, where borrowers state their income and don’t back it up with documentation. But rates are higher and borrowers have to put in 30% of their own money, up from 20% a year earlier, Walter said.
Things are returning to the way they were when loans were denied to people who couldn’t afford them, Walter said.
A December survey by the California Association of Mortgage Brokers found that 59% of mortgage brokers queried said it would be harder to get a loan this year.
