RANCHO BERNARDO -- Accredited Home Lenders Holding Co., which sells mortgages to customers with poor credit, on Wednesday reported a loss of $37.8 million for the fourth quarter of 2006, compared with a profit of $43.5 million for the same period a year ago. The company reported earnings of $57.7 million for all of 2006, a 63 percent drop from the $155.4 million earned in 2005.
Accredited is part of the once booming market in "subprime" mortgages, home loans that carry a higher interest rate because they are given to borrowers with poor credit. When housing prices skyrocketed two years ago, many lenders loosened the standards for subprime borrowers, giving home loans to almost anyone regardless of past credit history.
But with a cooling housing market, many subprime borrowers are defaulting on their loans, causing financial turmoil throughout the industry.
The company's financial performance, combined with the declining subprime lending market, has led Accredited to put a stronger emphasis on screening subprime borrowers to make sure that they can repay their loans, the company said Wednesday. Joseph Lydon, the company's chief operating officer, speaking during a telephone conference, said that the subprime market could get worse before it gets better.
"Unless the market moves the way it should, there will be plenty of additional blood flowing in the streets," he said.
The Center for Responsible Lending in North Carolina predicted in a December report that 2.2 million subprime loan borrowers would default on their loans in the next several years. It also predicted that one out of every five subprime mortgages signed in the previous two years would end in foreclosure. The center studied 6 million subprime mortgages between 1998 through the third quarter of 2006.
The surge of borrowers defaulting on their loans and lack of investor confidence in the subprime market have been death blows for two California subprime mortgage lenders.
ResMAE in Brea filed for bankruptcy protection Tuesday after Merrill Lynch asked the company to repurchase $300 million worth of loans. Most mortgages are packaged with other mortgages and sold to investors.
Ownit Mortgage Systems of Agoura Hills fired all 800 employees and closed for good in December because it couldn't pay its bills.
Keith Gumbinger, a vice president at the mortgage research firm HSH Associates in New Jersey, said the declining housing market, combined with loose lending standards during the last two years, have come back to haunt the subprime market.
However, he said, the current industry troubles could be beneficial in the long term.
"We are going to see more losses as 2007 goes on, (and) more companies could close their doors," he said. "This is the first step toward getting back to lending sanity."
Accredited was founded in 1990 when Jim Konrath, former chief executive officer of Security Pacific Financial Services, teamed up with former venture capitalist Ray McKewon, opening the business above a San Diego automobile repair garage. The company went public in 2003. Konrath is chairman of the board, and Chief Executive Officer McKewon retired in July 2005.
Gumbinger said no one should be surprised that subprime customers are defaulting on loans: "They got that way for not paying their bills in the first place."
Contact staff writer Patrick Wright at (760) 739-6675 or pwright@nctimes.com. Comment at nctimes.com.
Mortgage Lenders Network USA, another subprime lender from Connecticut, filed for Chapter 11 bankruptcy protection Feb. 5. Along with more than $100 million in debts, Mortgage Lenders could be fined $7 million for failing to provide funding to almost 1,500 borrowers nationwide. The declining subprime market has even hurt non-lenders, such as New Century Financial from Irvine and International banking firm HSBC Holdings.
