February 23, 2007: Sub-prime debt: A mess and getting worse

There are continuing signs of deterioration in the sub prime mortgage market. It is bad now, and 2006 was much worse than previous years. Spreads on subordinated sub prime have widened by 700+ basis points. Worse, the following companies have SHUT DOWN their sub prime mortgage operations recently.

Acoustic Home Loans
Meritage Mortgage (Net Bank sub)
Sebring Capital Partners
Ownit Mortgage Solutions
Harbourton Mortgage Investment
Mortgage Lenders Network
Preferred Advantage
Secured Funding Corp.
Origen Wholesale Lending
Popular Financial Services
Bay Capital Corp.
Funding America, LLC
EquiBanc Mortgage (Wachovia unit)
Rose Mortgage
Mandalay Mortgage LLC
Summit Mortgage
Millenium Bankshares
DeepGreen Financial
Lenders Direct Capital
Concorde Acceptance
ECC Capital/Encore Credit
ResMAE Mortgage Corp.
Silver State Mortgage

I suspect many more to follow in their footsteps. IMO, the only sub-prime companies likely to survive will be those affiliated with more diversified institutions.

Sadly, many major diversified institutions have substantial sub-prime exposure and may be left as the "last man standing...holding the bag".

Sub-prime exposure in some of the brokerage mortgage business has increased recently with acquisitions by Merrill Lynch, Morgan Stanley and others. It is even more pervasive in the banks and speciality finance companies, consumer finance and credit card operations. CompuCredit (CCRT) and AmeriCredit (ACF) are two with a whole lot of sub-prime exposure. Washington Mutual (WM) has added sub prime exposure lately, to over $19 Billion (7% of loans).


Resource Capital (RSO) and Deerfield Triarc (DFR), however, have increased their exposure to alternative investment portfolios and are NOT reliant on sub prime assets to be able to meet growth objectives.

Weeks Fargo, a suspect for many sub-prime loans is, in fact, not financially responsible for the loans themselves. They have provided mortgage services to small mortgage brokerages - not the loan itself.

National City Bank (NCC) sold its First Franklin sub prime unit to Merrill Lynch in late 2006. National City retained $7.5 Billion of First Franklin loans due in part to deteriorating credit quality trends which caused these loans to revert back to National City from ML.

This is the tip of the iceberg in the sub prime mortgage business. More tidbits, courtesy of CSFB research:

Sub prime Exposure:

Bear Stearns (EMC Mortgage)
Lehman Bros. (Aurora, BMC Mortgage)
Merrill Lynch (GPC unit, First Franklin)
Morgan Stanley (Saxxon Capital)
Citigroup (Citifinancial)
JPMorgan sold most operations in 2006, some residue
Countrywide
US Bancorp


This is a sampling and is not to be used for comparison with other companies. Parsing sub-prime from non-performing loans at this stage is as difficult as guessing a property appraisal. I can't do it.

Many brokerages have BUY ratings on companies with sub prime assets. True, the very large companies mitigate risk through massive diversification. But many of the medium and small companies should be researched with a watchful eye towards sub prime loans, and the loss reserve for a continued massive default from customers that should have never been given a loan to begin with. Not stated in any report I reviewed -appraisal fraud.