Subprime Lenders Face Fallout From New Laws
By MATHEW PADILLA
Orange County mortgage companies have seen their business slow since interest rates bottomed out this summer. But there’s another, potentially bigger threat to the county’s subprime lenders: politicians.
Governments from Los Angeles to the Carolinas have passed laws restricting subprime lenders, which make higher-interest loans to people with imperfect credit.
The laws are being felt in OC, which is a nucleus of the subprime industry.
Irvine-based New Century Financial Corp. said it expects to make 60% fewer loans in New Jersey after the state’s Home Ownership Security Act went into effect last week. The law, which seeks to curb predatory lending, is one of the toughest.
For New Century, the expected decline in Garden State business shouldn’t have a big impact, said Carrie Marrelli, the company’s vice president of investor relations. The state accounts for 3% or less of New Century’s overall loan production, which stood at $22 billion through October.
But New Jersey could be just the tip of the iceberg. As many as 16 other states have passed or are considering similar laws.
Publicly traded New Century is the most visible of OC’s subprime lenders.
The group also includes privately held Ameriquest Mortgage Co. of Orange; Irvine’s Option One Mortgage Corp., part of H & R; Block Inc.; and Orange’s Long Beach Financial Corp., part of Washington Mutual Inc.
Backers of the laws governing subprime lenders say they are designed to deter companies from preying on the uneducated, elderly and minorities by leading borrowers into costly loans they can’t afford. The result can be foreclosed homes, critics say.
Industry officials counter that the new laws merely will hurt people who can’t get loans anywhere else.
Rating Challenge
In California, Oakland and Los Angeles have passed tough ordinances restricting subprime lending.
In both cases, Wall Street buyers of subprime loans repackaged as securities could be held liable if a lender is found to be in violation of the ordinances.
Selling loans as securities is critical for subprime lenders, which use the proceeds to make new loans.
Last month, New Century sold $740 million in home loan debt, while Ameriquest sold $1.2 billion worth.
California itself has a subprime lending law, though it doesn’t make buyers of loans sold as securities liable. And that’s a deal breaker, according to Marc Loewenthal, New Century’s senior vice president of corporate affairs.
“Rating agencies will not rate those loans” made in cities with far-reaching liability laws, he said. “And, in consequence, nobody will purchase them.”
As of Nov. 1, New Century stopped making loans in Oakland, Loewenthal said. The company doesn’t break down its loans by city, though California accounts for 40% of its lending.
The ordinance in Los Angeles,a bigger, more important market,is on hold for now.
Officials there have opted not to enforce the city’s law until an industry legal challenge to Oakland’s is settled.
The state’s Supreme Court is considering whether to hear the industry’s challenge after the California Appeals Court upheld Oakland’s law.
Meanwhile, debt rating agencies Standard & Poor’s and Fitch Ratings have said they won’t rate bonds backed by subprime loans made in Oakland, according to Melissa Richards, outside general counsel with the Sacramento-based California Mortgage Bankers Association.
Moody’s Investors Service hasn’t responded to a letter the association sent asking for its position on the issue, she said.
Lending Crisis?
The ratings and liability issue could cause a lending crisis in Oakland, Los Angeles and New Jersey, Richards said. That’s what happened in Georgia after the state passed an anti-predatory lending law last year, she said. The legislature was forced to rewrite the law.
“The mortgage finance industry is based on liquidity,” Richards said. “If the investor community pulls away, we can’t make loans.”
California’s law was passed in 2001 and took effect last year.
It is designed to keep subprime lenders from making loans to borrowers who can’t afford them and could see their homes foreclosed on later.
Other provisions ban lenders from charging a prepayment penalty after the first three years and require them to disclose to borrowers they could lose their homes for failing to pay.
Consumer advocates say California’s law doesn’t go far enough because it doesn’t make investors in subprime securities liable.
Critics have found a local advocate in state Sen. Joe Dunn (photo), a Santa Ana Democrat. He pushed for a stronger state bill and he supports the ordinances in Los Angeles and Oakland, according to spokesman Chris Schreiber.
The senator also backs making investors of subprime loans liable, Schreiber said.
“We believe that is a great way to clean up the industry,” Schreiber said.
Holding investors liable will prompt them to “deal only with reputable people,” he said.
The next logical step, according to Schreiber, is to pass similar regulations in Santa Ana and San Francisco, cities with big numbers of minority, poor and elderly residents.
New Century’s Loewenthal said his company can live with regulation but would like to see Congress pass a uniform, national law that replaces the differing local and state versions. The company lobbies federal and state officials about the issue, he said.
