Subprime lenders have been both blessing and bane in the housing industry for many years, enabling lenders to rake in huge profits while saddling consumers with exorbitant loan terms and high interest rates.
Now, as the housing market slows to a crawl, many subprime lenders are collapsing faster than homes made of substandard materials, and the signs point to even more pain in the housing market as a result.
Mortgage Lenders Network USA (MLN) announced it was shutting its doors today, as a result of market economics the lender said were "not good ... it deals with the performance of loans, and to a lesser extent the value of homes."
The company's abrupt shutdown left many brokers scrambling to find new financing for their clients' home purchases.
The Connecticut-based lender grew from 7 employees in 1997 to 1,800 ten years later, fueled by sharply-cut interest rates which enabled mortgage lenders and brokers to push home loans to clients who might not otherwise have been able to purchase.
Now, with strapped homeowners falling behind in their payments in greater numbers, foreclosures on the rise, and interest rates at their highest level in two years, companies such as MLN found themselves unable to finance new loans.
The last few months have seen a flurry of subprime lenders shut their doors, declare bankruptcy, or engage in mass layoffs as the housing market freezes up.
Ameriquest, formerly the country's largest subprime lender, collapsed quickly after its former CEO, Ronald Arnall, was appointed by President Bush to be ambassador to the Netherlands.
Ameriquest shuttered virtually all of its offices and laid off 3,800 employees thanks to the collapsing subprime market. Its demise was exacerbated by a $325 million settlement with 30 states' Attorneys General over deceptive marketing and lending tactics.
Subprime lender Ownit filed for bankruptcy in December 2006, after rising defaults on its mortgage holdings led Wall Street firms -- which bought and repackaged the loans Ownit held -- to seize the companies' assets and demand it take back the bad loans.
Ownit had formerly been the country's 11th-largest subprime lender, issuing more than $5.46 billion in loans in the first half of 2006.
Other subprime lenders potentially on the chopping block include Countrywide Financial and H&R; Block's mortgage unit Option One. The latter has been a particular target of wrath among ConsumerAffairs.com readers.
More Pain On The Horizon
The failures of subprime lenders are bad tidings for the housing market as a whole.
Just as low-income consumers feel the pain of gas or tax hikes first, subprime borrowers are the first to fall behind or default on their mortgage payments as interest rates rise.
A Center for Responsible Lending (CRL) study found that one in five subprime loans issued during 2005-2006 will fail, with over two million homeowners at risk for foreclosure as a result.
The CRL study placed much of the responsibility on the marketing of risky "creative" mortgage products such as adjustable-rate mortgages (ARMs) to consumers with bad or no credit, or bad financial histories.
A study conducted by the foreclosures (MBA) also found that subprime mortgages were experiencing higher rates of delinquency in the past twelve months.
Although economists and realtors continue to claim that the housing market slump has hit bottom, many still see delinquencies on the horizon, particularly as the ARMs reset to higher levels that consumers will not be able to keep up with.