The U.S. workforce just got lighter by 5,700 people. Countrywide Financial spent Monday reassuring their customers, while letting 500 employees go. By Thursday, the embattled lender's stock price climbed after Bank of America purchased $2 billion of the company's preferred stock. On Tuesday, Capital One shuttered GreenPoint Mortgage, a company they owned for less than a year. Accredited Home Lenders slashed jobs and halted lending on Wednesday, less than 24 hours after it announced that it was selling $1 billion of home loans to a private investor. And Lehman Brothers on Wednesday afternoon became the first firm on Wall Street to close its subprime lending unit.
"The severity of job loss is more than I expected," Mark Zandi, chief economist for Moody's Economy.com told BUILDER Online. He added that the lending industry has long been overdue for a major correction and he anticipates downsizings, firings, and failures to continue through next year.
"The industry has a long way before it is right-sized," Zandi said.
According to data compiled by global outplacement firm Challenger, Gray & Christmas, as of August 21, more than 35,000 job cuts were made in the mortgage industry. This week's announced layoffs send that figure over 40,000."There are two big issues behind the cuts. First, demand for new mortgages and home equity loans and other forms of credit have fallen off dramatically. The other issue is the increasing rate of defaults and foreclosures, which is leaving the lending institutions unable to meet their own financial obligations," said Challenger, Gray & Christmas CEO John A. Challenger.
"Last week, mortgage lenders basically told their loan officers and call center representatives to simply stop taking calls," Challenger continued. "They basically stopped on a dime, which means that thousands of call center workers, data processors, administrative staff, etc., are sitting idle.
"The situation is worsened by the fact that other financial institutions not directly associated with housing, such as Bear Stearns and Lehman Brothers, have been investing billions in mortgage-backed securities, which has made them extremely vulnerable to the turmoil in the housing market. Just last week, Bear Stearns announced that 240 workers would be laid off at its lending unit."
GreenPoint, which specialized in jumbo mortgages and loans that didn't require verification of the borrower's income or assets, was supposed to diversify credit card giant Capital One. Instead, 1,900 jobs have been cut. Accredited Homes Lenders' layoffs account for 62 percent of its workforce. And Lehman Brothers' closing of BNC Mortgage will represent 1,200 job losses.
Scottsdale, Ariz.-based 1st National Bank announced 500 layoffs on Tuesday, while California-based Quality Home Loans filed for Chapter 11 bankruptcy. Shutdowns were also announced this week for Houston-based Amstar Financial Holdings, which plans to close its mortgage unit's doors in December, and HSBC Bank, which will be closing their Carmel, Ind., operation by June, 2008.
John Burns, president of John Burns Real Estate Consulting, predicts that there will be more layoffs and more closures. And while it's easy to blame lenders, investors, and borrowers, he suggests two more culprits.
"You can point the finger somewhat at the Fed for allowing interest rates to be low for so long knowing that there were so many adjustable rate loans being made, and for raising the federal fund rate 17 times," Burns told BUILDER Online. "But the bulk of the blame goes to the free market economy. Capital markets are used to taking risks and sometimes those risks don't pan out."
All of the mortgage lending casualties have one thing in common - they provided subprime and/or alt-a loans. Subprime lenders tend to make loans that require no minimum credit scores, no mortgage or credit histories, no documentation of income or assets. In some cases, people who were in or just out of bankruptcy were approved for loans.The result of so much subprime lending is record foreclosures throughout the country, the shuttering of multiple lenders, and a fluctuating stock market. And, according to Zandi, now any company whose focus is mortgage lending has potential for problems.
Meghan Burns, co-founder of offerangel.com, an online company that helps borrowers understand the terms of their mortgage, predicts that the mortgage industry is creating a ripple effect spilling over to the auto, home improvement, and home equity loan businesses.
"It is going to get a lot worse and continue," she stated.
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