How mortgage meltdown sank Oak Street, others:

August 20, 2007

Just three years ago, Steve Alonso was at the top of his game. The veteran mortgage banker was a finalist for Ernst & Young's Indiana entrepreneur of the year award, and his fast-growing company, Oak Street Mortgage, was ready ing for a $150 million initial public offering.

Investors should feel fortunate the IPO never happened. Today, Oak Street sits in the evergrowing scrap heap of firms that failed amid the meltdown of the subprime-lending market.

"I think we built a great company, one of the larger companies here in the Indianapolis area. We had good folks in place. We had a good business proposition," Alonso said from his Carmel home this month.

"It's just that when a perfect storm hits a very cyclical business, you realize it's difficult to overcome the marketplace, no matter how good your folks are."

Indeed, if there's any consolation for Alonso, it's that he's far from alone. More than 70 U.S. mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data.

The turmoil began in the subprime segment-which targets borrowers with the shakiest credit. When the nation's housing market turned soft, causing home prices to plateau or fall, subprime defaults spiked. Making matters worse: Many borrowers had taken out mortgages with teaser rates that ratcheted higher after a few years.

Those problems now have spawned a credit crisis that's engulfing mortgage lenders of all stripes and sending shock waves through the overall economy.

As worries escalate, mortgage firms find themselves in an ever-tighter squeeze. Rattled lenders are cutting off credit lines mortgage firms had tapped to make loans. And the investors that used to buy those loans have stopped doing so, or are paying far less.

"If you borrowed $100,000 to make a $100,000 mortgage, all of a sudden you couldn't sell it for $100,000," said Alonso, a longtime Bank One executive before launching Oak Street in 1999.

About 40 percent of Oak Street's loans were subprime. Last September, as that segment was beginning to weaken, Alonso sold most of Oak Street's operations, including 21 retail offices, to Kansas City, Mo.-based Novastar Financial Inc.

Alonso said he'd concluded Oak Street needed to be "aligned with a larger player, because the mortgage industry was becoming very, very competitive." Even though loan demand had slackened, the industry was awash in capital available to fund deals. Thus, margins had shrunk.

After the sale, Oak Street wound down operations, unloading remaining loans into the increasingly weak market. In June, Oak Street slid into Chapter 11 bankruptcy, listing assets of $2.1 million and liabilities of $9.7 million.

"The market is devaluing mortgages," Alonso said, in many cases more than is justified. "I think it's an overreaction."

Indeed, almost any financial institution with its toes in the mortgage business is getting singed these days.

Shares of Columbus, Ind., banking company Irwin Financial Corp. have tumbled 57 percent this year, largely because of persistent problems in its home-equity-loan division.

I n d i a n a p o l i s - b a s e d First Indiana Corp. this month reported that it took a $3.4 million pretax charge in the second quarter due to home-equityloan losses. It said turmoil in mortgage markets also would hurt third-quarter results.

Work force fallout

When the dust settles, Hoosier employment in the mortgage industry will have tumbled.

Nearly 2,000 people worked in the industry in the state as of last fall, according to the Bureau of Business Research at Ball State University, down from a peak of nearly 2,800 in 2003.

That segment was slammed early last year when Fort Wayne-based Waterfield Mortgage sold its loanorigination business to Long Islandbased American Home Mortgage, a move that wiped out 650 Allen County jobs.

Now, it's even worse. American Home this month shuttered operations and filed for bankruptcy protection, wiping out another 150 jobs in that area.

The Oak Street odyssey had a similar ending. That company at its peak had a work force of about 700, many of them local. Novastar hired on about 500 before it ran into trouble, too. Now, its stock is off 94 percent this year, and analysts are questioning whether it can survive.
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