Fierce competition from "irresponsible players" such as Ameriquest Capital Corp., New Century Financial Corp. and real estate investment trusts are to blame for tumbling earnings, according to America's largest mortgage banker.
Countrywide Financial Corp. announced mortgage banking pretax earnings fell to $434 million from $703 million in the third quarter, although they were 67% better than in the fourth quarter 2004.
The earnings were hampered by production sector margins, which dropped to 0.09% of loan volume in the fourth quarter from 0.32% in the third quarter and 0.61% a year earlier, Countrywide said. Prime margins of 65 basis points declined only 11 BPS and 25 BPS on a respective quarterly and annual basis, but the gain on sale on nonprime products of 114 BPS came in 50% and 69% below the previous quarter and fourth quarter 2004, respectively, according to the announcement.
So far in this quarter, subprime margins have improved slightly but nowhere near the pace of prime margins, Countrywide said in a telephonic conference.
"It's the Ameriquests and New Centuries of the world" as well as "companies that have a REIT," explained a Countrywide executive. "They're dumping the losses into the REIT and then securitizing the stuff they have a profit in."
While weaker secondary market conditions affected profit margins on the back end, on the front end, the hindrance came from competitive pricing pressures by mortgage players who priced loans too low as a means to retain market share, the Calabasas, Calif.-based lender suggested.
"We had some irresponsible players," a Countrywide executive continued. "No question the key players there [were] Ameriquest and New Century."
"I've been doing this for 53 years," he added. "I've never seen that situation sustained over a long period of time. Eventually they gag on it."
Countrywide said it could see "a little crack in the armor" already, citing the recent settlement Ameriquest made to resolve charges of predatory lending with 49 states and the District of Colombia, as well as the 10% staff reduction Ameriquest Mortgage Co. made last November.
Ameriquest declined to comment on Countrywide's statements.
New Century told MortgageDaily.com in an e-mailed statement, "We believe the pricing environment is improving and have been responsibly raising rates to restore our profit margins to acceptable levels."
Countrywide forecasts some consolidation will take place this year, with "people getting out of the business, the weaker ones folding and that will all ... help us to get a better spread" on loans.
"Irresponsible players either stop their irresponsible behavior or be knocked out for one reason or another," Countrywide added.
The lender, however, doesn't see margins getting worse than the fourth quarter. Its guidance for 2006 has pretax mortgage banking production margins between 15 BPS to 40 BPS.
Compared to the reported mortgage banking segment pretax earnings of $2.4 billion for 2005, the mortgage behemoth expects this year's total between $1.85 billion to $2.55 billion.
Residential production in 2005 of $491 billion -- an industry and company record -- may or not sustain, as the lender expects to account for about $400 billion to $600 billion of the mortgage market's total of $2.2 trillion to $3.2 trillion.