More bankruptcies, job cuts, survival loans as mortgage shakeout continues

NEW YORK — As the mortgage shakeout forces dozens of home lenders into bankruptcy, some are merely going into something like suspended animation — shutting down temporarily and hoping to escape intact once the crisis has run its course.

Meanwhile, surging mortgage defaults whacked U.S. banks and thrifts in the second quarter. Profits fell 3.4 percent to $36.7 billion, and reserves to cover loan losses soared 75 percent from a year ago, regulators said today.

Also today, JPMorgan Chase, Bank of America, Citigroup and Wachovia each borrowed $500 million at the Federal Reserve's so-called discount window to ensure adequate liquidity.

In the midst of the shakeout are more than 24,000 workers nationwide who have lost jobs in the financial-services industry since the beginning of the month — with more than half coming since last Friday. With few exceptions, the cuts are the direct result of woes in the nation's housing market.

More layoffs are announced daily. Today, Lehman Brothers closed its "subprime" mortgage business, laying off 1,200 workers at 23 offices; 1st National Bank closed its wholesale mortgage unit and cut 541 jobs, and Accredited Home Lenders added 1,600 positions to the heap. The night before, banking giant HSBC said it would close a main financing office and cut 600 jobs.

Since the start of the year, more than 38,000 workers have lost their jobs at mortgage lending institutions, according to recent company layoff announcements and data complied by global outplacement firm Challenger, Gray & Christmas. Meanwhile, construction companies have announced nearly 20,000 job cuts this year, while the National Association of Realtors expects membership rolls to decline this year for the first time in a decade.

It's an employment decline that threatens to rival the massive layoffs in the airline industry that followed the Sept. 11, 2001, terrorist attacks, when some 100,000 employees lost their jobs.

"It's far from over," said Bart Narter, a senior analyst with Celent, a Boston-based financial research and consulting firm. "The subprime lending collapse will continue to ripple through the financial sector."

For five years, the nation's housing market was booming and mortgage companies grew quickly, at times offering lucrative jobs to people with little experience. But as home values declined and interest rates rose in the past year, rising delinquencies and defaults — especially in subprime mortgages targeted at borrowers with risky credit — have pounded lenders who couldn't keep pace.

"These kind of mortgage lenders just sprung up like mushrooms and grew like men," said John A. Challenger, chief executive at Challenger, Gray & Christmas. "They staffed up and now you have a bust."

America's largest mortgage lender, Countrywide Financial, began an undisclosed number of layoffs this week. Last week, Arizona mortgage lender First Magnus Financial shut down its operations and laid off nearly 6,000 workers. On Monday, Capital One Financial said it would shutter Greenpoint Mortgage, its wholesale mortgage banking business, and lay off 1,900 employees.

"It's only been weeks," Challenger said. "These companies are acting remarkably quickly, stopping on a dime."

Companies like Accredited Home Lenders and Hanover Capital Mortgage are scaling back, hoarding cash and hoping to stay alive.

"It is kind of putting their business into somewhat of a hibernation mode," said RBC Capital Markets analyst Jason Arnold. "Anyone who goes into this kind of protection mode, if they can make it through the challenges, they will probably emerge on the backside in a much better competitive environment."

The turbulence in the mortgage market began in February when "subprime" lenders, which cater to borrowers with bad credit, reported borrowers were missing more payments. This ignited a wave of bankrupt lenders, most notably New Century Financial.

A few months later, the Wall Street banks that provide the cash for mortgage lenders decided the business was too risky. This led to a liquidity crisis, forcing bankruptcies even among prime lenders.

Accredited Home Lenders, the nation's biggest subprime lender, said early today it is closing most of its business, essentially waiting in the cellar while the tornado passes. The San Diego-based lender will cut its work force to 1,000 from 2,600 as of the end of June.

The company said it has enough cash to "maintain its downsized operations" until the market improves. Chief Executive James Konrath said he expects the company to compete in the mortgage industry "when it functions more rationally."

Another major subprime lender, NovaStar Financial, last week said it plans to lay off more than a third of its workers and stop issuing loans through brokers. The decision to scale down its business "is painful but is required by market conditions," the company said at the time.

These companies hope to avert the fate of American Home Mortgage, which tumbled from being the country's 10th-biggest home lender to a bankrupt company whose shares trade at about 20 cents.

Other companies like Thornburg Mortgage and Luminent Mortgage have cut deals giving away big pieces of themselves, or their best investments, in exchange for enough cash to repay creditors and stay alive.

In a research report today, Friedman Billings Ramsey analyst Paul Miller said it will take six months to a year for money to flow back into the market.

"There is no quick fix here," he said. "It will take time."

Results for the nation's financial institutions released today from the Federal Deposit Insurance (FDIC) showed that higher expenses for noncurrent loans, along with lower interest from investments, hurt profits in the April-June period.

The impact of the nation's worsening housing downturn on federally insured banks and savings institutions was evident in all aspects of the FDIC data for the second quarter.

The increases in noncurrent loans — 90 days or more past due — and set-aside reserves to cover losses were the biggest in 16 years for banks and thrifts. Total past-due loans jumped by 10.6 percent, to $6.4 billion, and nearly half the increase came from home mortgage loans.

In the largest jump since 1996, 824 financial institutions reported net losses for the quarter, up from 600 a year earlier. Especially hard-hit were smaller banks and thrifts and those heavily concentrated in home-mortgage and commercial lending.

FDIC officials acknowledged that more details of the housing market stress will show up in results for the current quarter. The occurrence of what they call "declining credit quality" for banks likely will hit with fuller force in the July-September period, they said.

FDIC Chairman Sheila Bair noted many high-risk subprime mortgages for borrowers with weaker credit histories, which initially feature low interest rates, will reset this year and next into higher rates that will shock and distress many homeowners.

"The payment reset problem is there and it's looming large," Bair said in a meeting with reporters.

In the second quarter, noncurrent home loans rose by $3.1 billion, or 12.6 percent, from a year earlier, the FDIC's report said.

It was the fifth straight quarter of increases in residential noncurrent loans. Noncurrent loans for real estate construction and development soared $2.2 billion, or 39.5 percent.

Banks and thrifts set aside $11.4 billion to cover loan losses during the second quarter, up 75.3 percent and the highest level since the fourth quarter of 2002, the FDIC said.

A huge spike in soured loans for real estate construction and development also hurt bank earnings.

"Banks continued to face two key challenges — a difficult interest-rate environment and ongoing weakness in residential mortgage lending," Bair said. "The market's going through a period of adjustment. We knew it was coming; it was inevitable."

Mortgage delinquencies and foreclosures have skyrocketed this year, driving numerous lending companies into bankruptcy. Figures released Tuesday by research firm RealtyTrac showed foreclosures soaring 93 percent in July compared with a year earlier.

The federally insured and regulated banks and thrifts have not been big issuers of subprime mortgages that triggered widespread anxiety in recent weeks as more evidence surfaced of big jumps in defaults and foreclosures.

As credit worries drag stock and bond prices lower in financial markets, investors have grown increasingly nervous about all types of home loans — stoking concern that lenders are seeing problems with quality-credit mortgages.

In recent weeks, the U.S. Federal Reserve and other nations' central banks have injected billions of dollars into the banking system. On Aug. 17, the Fed also cut by a quarter point to 5.75 percent the short-term discount rate it charges on overnight loans to banks.

On Tuesday, the Treasury Department's Office of Thrift Supervision reported that noncurrent loans at U.S. thrifts jumped to $14.2 billion in the second quarter, up 50 percent from $9.5 billion from a year earlier. That's the highest level of noncurrent loans at U.S. thrifts since 1993, with most of the problems in home mortgages.

Still, given the circumstances, Bair said, the industry is in sound financial condition as the market adjusts and its second-quarter performance was "very solid."

Although profits declined 3.4 percent, the $36.7 billion recorded was the fourth-highest quarterly total since the FDIC began publishing the statistics in 1986.