Mortgage Disaster is Not an Opportunity at This Point

December 23rd, 2007 by Andrew Chen

In my earlier post, “Does Disaster Always Spell For Opportunities?”, I was inclined to a positive answer. Today when I look back I feel the mortgage disaster will only spell for more disaster. New century finance and Encore credit Corp was out of business since then. New century employed more than 5000 people at the time and Encore employed more than 1000 people

at its peak. Novarstar financial is still around but looks like its going to have the same faith as the previous two. Accredited Home Lenders was purchased by a private equity firm Lone Start Funds. I bet the equity firm is regretting the decision they made.

The public companies I know that are still around in subprime mortgage business include Fremont General Corporation (FMT), Downey Financial Corp.(DSL), Country Wide Financial (CFC). But I heard that the subprime mortgage secondary market virtually disappeared. I was working in the mortgage industry before so I kind of understand what secondary market is. The secondary market is a market where large group of mortgage loans being bought and sold. Usually the transaction amount is in billions. The participants of the market including the big banks like Citi Bank, BOA, HSBC, ect. It also includes the mortgage lender like New Century, Encore, Novastar and Fremont. The mortgage lender directly deals with borrowers like you and me. They loan money to home owners and then they will sell the loans they generated to the big banks in trunks. That is how they make money. Now because there are so many subprime borrowers default their loans the risk involved in subprime loans is way too high to justify for its return. And no banks will be willing to buy subprime loans and that is why the seondary market disappeared. If the lender can not sell their mortage to the big banks they won’t get back the money they need to keep the mortage business going. That’s why so many mortgage companies out of business or looking for alternative capital source.

The mortgage companies that are still around are either trying or already exit the subprime mortgage market. Whether these companies are good investment opportunity? I don’t feel they are at the point. Mortgage business will be good only when the real estate market is doing well. It seems that real estate market will be down or flat for a long while. So does disaster always spells for opportunity? Maybe, but it is all about timing!