Economy and Banking & Finance

BEHIND THE NEWS: Housing slowdown roils state's mortgage industry

April 30, 2007

Home lending might sound like a staid business. But anyone weathering the changes now sweeping through the Indiana mortgage market knows otherwise.

Last year, we saw the sale of two huge Indiana-based home lenders-Fort Wayne-based Waterfield Mortgage and Fishers-based Irwin Mortgage. Also sold was Carmel-based Oak Street Mortgage, which not long ago had been a high-flier poised to go public.

These weren't cases of owners cashing out at the top of the market. Quite the contrary. Irwin Mortgage had become an albatross for its Columbus-based parent, Irwin Financial Corp., which ultimately broke up the business and sold it to several buyers.

It was a similar tale at Waterfield, then the parent of Union Federal Bank of Indianapolis. Waterfield unloaded its mortgage operations to multiple buyers early last year, then spent months trying to sell Union Federal to Ohiobased Sky Financial Corp.

The big hangup: Sky feared it would end up on the hook for lingering liabilities from the mortgage operations. Sky agreed to complete the $321 million purchase last October only after Waterfield agreed to stash up to $15 million in escrow to protect the Ohio bank from losses.

Oak Street was in the subprime game-the business of making loans to customers with shaky credit-a oncesizzling field now in the midst of a meltdown.

"For anybody who has anything to do with the mortgage business-even the clean, healthy shops that never got involved in subprime-business is way down," said John Reed, president of David A. Noyes & Co.'s Investment Banking Group.

To be sure, it's the subprime mortgage firms that are suffering the worst bruises. They've been battered by a spike in late payments from borrowers, a decline in demand for their loans, and a cash squeeze brought on by nervous creditors.

The biggest independent subprime lender, California-based New Century Financial Corp., sought bankruptcy court protection in April. Since the start of the year, at least 50 mortgage lenders have halted operations, gone bankrupt or sought buyers, according to Bloomberg data.

All this is happening against the backdrop of a sputtering housing market. In many parts of the country, home prices are falling. That's left some homeowners who'd tapped the equity in their homes through second mortgages saddled with debts exceeding the value of their homes.

The circumstances are even bleaker for speculators who bought multiple properties with little or no money down in a bet that home prices would continue to rocket higher.

Even in central Indiana, which never saw the boom coastal markets experienced, home builders have retrenched amid slack demand. In the 12 months through February, the number of residential building permits issued fell onethird.

The difficult national market conditions drove last September's sale of most of the operations of Oak Street Mortgage, which National Mortgage News had ranked among the nation's 40 biggest subprime lenders.

Founded in 1999 by former Bank One executive Steve Alonso, Oak Street rode a red-hot housing market to become central Indiana's fastest-growing private company in 2003, according to IBJ research. The next year, it registered for a $150 million initial public offering, a plan it later tabled.

Alonso-who could not be reached for comment-sold on the front end of the subprime slump. Since then, conditions have turned far worse. The purchaser of most of Oak Street's operations, Kansas City, Mo.-based Novastar Financial Inc., recently said it's seeking a buyer. Novastar's shares have plunged 75 percent this year.

Economic expectations

Business observers say there's a risk the housing slowdown could snowball through the economy, crimping overall consumer spending in addition to smacking industries directly tied to housing.

But not everyone buys into the gloomand-doom scenario.

Take Richard Hall, CEO of Indianapolis-based Ace Mortgage Funding, which ranked ninth last summer on IBJ's list of fastest-growing private companies.

The company has kept up the pace since. After the Atlanta-based private equity firm Roark Capital Group bought majority ownership of Ace late last year, the Indianapolis firm scooped up a Vancouver, Wash.-based competitor, Millennium Funding Group.

Ace originated more than $3 billion in loans last year and expects business to be up at least 30 percent this year.

Hall said Ace has prospered in part because subprime loans make up only about 10 percent of its business. Its biggest product line-debt-consolidation loans for borrowers with good credit-remains strong.

Rather than battening down the hatches, Hall sees cause for optimism.

"Incomes are going up faster than inflation, and unemployment rates are extremely good," Hall said.
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