Subprime Mess Shakes Mortgage Industry

The number of mortgage originators in Connecticut shrunk dramatically over the past year from approximately 13,000 in April 2008 to about 5,600 today, a decline of more than 55 percent, according to data obtained from the state Department of Banking.

The steep retraction within the industry is due largely to a backlash against subprime mortgage products, which were at the heart of the current financial crisis, industry experts said.

“I’m surprised there aren’t more originators that have gone away,” said Stephen Habetz, president of Threshold Mortgage Co. in Westport. “The subprime mortgage industry was very profitable for the last five years but now that lending has dried up.”

A non-depository mortgage originator is an individual or company that assists buyers in applying for a mortgage with different banks or lenders.

Although the subprime crisis hasn’t hit Connecticut as hard as other parts of the country, 59,000, or 11 percent of the 540,000 active residential mortgages in the state are subprime, according to the Connecticut Housing and Finance Authority.

Kim Neilson, executive vice president of McCue Mortgage in New Britain, said that when the subprime market was booming in recent years, many people were trying to get into the business. But now that those products are frowned upon by banks and other lenders, the market for them no longer exists.

“A lot of companies that were not long-time stalwarts in the business have exited it,” Neilson said.

“You had people running mortgage companies out of their basement who didn’t have stringent lending requirements in place,” Habetz added. “Lenders aren’t going to put up with someone writing bad loans anymore. It’s a little bit of revenge of the underwriter.”

Habetz said 2008 was one of the worst years in the history of the mortgage market and that only the stronger, well-capitalized companies have weathered the storm.

He said Federal Housing Administration loans are the products of choice within the industry right now because they are backed by the federal government. But to offer those loans, mortgage originators must meet certain net worth requirements and also pay annual fees, which can cost thousands of dollars.

As a result, smaller mom and pop originators are finding it very difficult to survive, he said.

“That’s going to knock a lot of the players out of the market,” Habetz said. “It’s very difficult to be competitive without offering those types of loans.”

But it’s not just the lack of a subprime market that is causing the industry shakeout. Overall home sales in the state have also plummeted, meaning there are fewer loans to underwrite.

Single-family home sales from January through March fell 27.7 percent to 3,568 from 4,932 a year earlier, according to the Warren Group, a Boston-based real estate publication. It was the slowest sales pace for a first quarter since The Warren Group began tracking Connecticut home sales in 1987.

Connecticut’s condominium sales during the first quarter also fell to their lowest levels in at least 22 years, plummeting 39.5 percent to 1,103 from 1,823 in the first quarter of 2008.

Alan Rosenbaum, president and CEO of GuardHill Financial in New Canaan, said there are also fewer channels available for originators to sell the mortgages they underwrite.

He said some banks have gotten out of the wholesale mortgage business, meaning they no longer use outside broker-dealers to bring them loans, cutting off access to originators who have traditionally used them.

“If you run out of banks to do business with, you run out of money to keep operations going,” Rosenbaum added.

Waterbury-based Webster Bank, for example, walked away from that business over a year ago, and now only underwrites mortgages produced by internal loan officers, said Ed Steadham, a spokesman for the bank.

“We decided to do away with the wholesale business so that we can concentrate on direct consumer lending,” Steadham said. “We wanted to refocus on our core banking operations.”

Rosenbaum said Bridgeport-based People’s United Bank and Citibank have also reduced or eliminated their wholesale businesses.

“Banks are cutting off that line of business because they didn’t have much control or oversight over it,” Rosenbaum said. “That was one of the biggest problems with the mortgage industry. Banks were looking for volume rather than quality.”

As a result of the mortgage crisis, Rosenbaum said there has been a lot of consolidation in the industry and that larger mortgage companies with reputable names are actually adding staff and gaining market share.

GuardHill Financial and McCue Mortgage have each added staff over the past year, and are seeing loan officers from smaller companies move to larger, more stable ones.

Rosenbaum said he expects that trend to continue in the months ahead. “Quality is what’s going to survive,” he said.