S&P/Case-Shiller Home Prices Fell 4.4% in August

Home prices in 20 U.S. metropolitan areas slumped in August by the most in at least six years, a private survey showed today.

Values dropped 4.4 percent in the 12 months that ended August, an eighth consecutive decline, according to the S&P/Case-Shiller home-price index, which has data back to 2001.

The figures reinforce the view among Federal Reserve officials and Treasury Secretary Henry Paulson that the housing slump has further to go. Near-record inventory levels suggest sellers will continue to lower prices, posing a threat to consumer spending because homeowners will have less equity to borrow against.

This is really the No. 1 risk: a sustained, sharp decrease in home prices really squeezing consumers,'' said Meny Grauman, an economist at Scotia Capital Inc. in Toronto.

Economists forecast the gauge would decrease 4.2 percent, according to the median of 11 estimates in a Bloomberg News survey.

The group's 10-city composite index, which has a longer history, dropped 5 percent in the 12 months ended in August, the most since June 1991.

In a separate report, an index of consumer confidence declined to 95.6, the lowest since October 2005, from a revised 99.5 the prior month, the New York-based Conference Board said. The index was forecast to drop to 99, from an originally reported reading of 99.8 for September, according to the median estimate in a Bloomberg News survey of 70 economists.

Compared with July, home prices in the 20-city index fell 0.7 percent after a 0.4 percent decline the month before. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

``The fall in home prices is showing no real signs of a slowdown or turnaround,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, in a statement. ``There is really no positive news in today's report.''

Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

The index is a composite of transactions in 20 metropolitan regions. Fifteen cities showed a year-over-year decline in prices, led by a 10 percent drop in Tampa, Florida, and a 9 percent decline in Detroit. The area showing the biggest gain was Seattle with a 5.7 percent increase.
Fed Forecast

Most economists expect housing to extend its slump and continue to be a drag on economic growth as loan foreclosures rise and tougher lending standards make borrowing more difficult.
Traders and economists expect the Federal Reserve to cut its benchmark overnight lending rate between banks tomorrow by at least a quarter point. Policy makers on Sept. 18 reduced the interest rate for the first time in four years, to 4.75 percent from 5.25 percent.

Paulson said today it's too soon to call an end to the housing slump.
``We haven't hit the bottom yet in housing,'' Paulson said at a conference in New Delhi. Still, he added ``there is enough strength in the economy that we can grow through this.''
Homeownership in the U.S. has dropped the last four quarters, the longest string of declines since at least 1981, the Census Bureau said on Oct. 26. Also last quarter, a record 17.9 million U.S. homes were vacant.

Sales of existing homes dropped last month to the lowest level since record-keeping began in 1999. The decline to a sales pace of 5.04 million annual rate brought the inventory of homes for sale to a record high of 10.5 months' supply. The median price of resales fell 4.2 percent from a year earlier.

The price measure from the Realtors group can be influenced by changes in the types of homes sold. Because the S&P/Case- Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track the same home over time, economists say these more accurately reflect price trends.

Recent price cuts may not be enough to bring in some buyers. Pulte Homes Inc., the third-largest U.S. homebuilder said Oct. 25 that the reductions it's enacted didn't boost sales last quarter.

``Time has proven that no one can be sure when this particular downturn will end or begin to show signs of stabilization,'' Chief Executive Officer Richard Dugas said on a conference call. ``Since we are not sure how long this environment will stay this bad, Pulte plans to be prepared for the worst.''

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Banks can help in times of distress

Banks must step up and provide loans during times of financial market distress and also help homeowners who find themselves behind in their payments of unfavorable mortgages, said Eric Rosengren, the new president of the Boston Federal Reserve Bank.

There might even be some profit opportunities for banks if they can move into the market for subprime mortgages, Rosengren said. Many of the independent brokers who created the market for subprime mortgages have gone out of business in recent months.

"While the subprime market that was the epicenter of the problem is likely to continue to have difficulties, I am hopeful that financial institutions will play an important role in providing financing for many of the borrowers facing higher rates as their mortgages reset," Rosengren said in his first speech after assuming his new post in July.

"The most critical issue is that financing that supports responsible subprime lending continues," Rosengren said.

Subprime is the industry shorthand for mortgages that are not the highest quality. Many lower middle class families were able to buy homes with such loans, but the sector also includes mortgages for higher-priced homes.

Instead, the central issue was a lack of liquidity, as relatively low-risk financial assets traded between large financial institutions experienced the most difficulty.

Bank balance sheets expanded in August and September as securitization of subprime mortgages and other asset-backed commercial paper declined.

Rosengren said that "conservatively underwritten securitizations and asset-backed commercial paper will find acceptance by investors" but said this will take some time.

In his remarks, Rosengren did not dwell on the economic impact of the recent financial turmoil.
He said that the effect of the problems in housing on consumption has been muted to date.
But he said if housing prices fall further or if the price declines spread across the country, this "would increase the risk of a more adverse impact on consumption."

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trimmed staff at its alt-A/conventional mortgage affiliate

Earlier this year, when Merrill Lynch forked over $1.3 billion to buy subprime lender First Franklin Financial Corp., and some of its affiliates, a handful of executives were dancing in the hallways at National City in Cleveland. NatCity owned FFFC and, indeed, it would seem that they sold the subprime shop at the top of the market (and before the nonprime liquidity crisis reared its ugly head). But let's forget about FFFC for a moment. Does anyone see the irony of Merrill Lynch — known for selling stocks to America's wealthy — trying to make a buck by lending to credit impaired Americans? Let's not forget that Merrill was a major (and I do mean major) warehouse financier of non-banks plying their trade in subprime, including Ownit Mortgage, Mortgage Lenders Network and ResMAE, among others. What do all these lenders have in common? They all filed for bankruptcy protection. Some in the industry even speculated that Merrill was engaged in a plan to reduce the number of subprime lenders so that FFFC would have less competition, a thought that only a conspiracy theorist would hatch. One subprime executive who sold loans to Merrill told me that Merrill "was one of the most aggressive buyers of loans. They paid more than anyone and they did less due diligence." He blamed Merrill's woes on a top trader there, whose identity I'll get to in a future column as I continue to research the roots of this crisis. On Friday Merrill Lynch estimated that it will take $4.5 billion in credit-crunch-related writedowns (net of hedges) on subprime mortgages, collateralized debt obligations and leveraged finance commitments.

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Fed cut sends long-term rates up

many would-be home buyers are about to be stripped of a misperception, namely the idea that when the Federal Reserve Board is cutting interest rates mortgage rates will fall as a result.

In a radio interview with Chuck Jaffe, MarketWatch senior columnist, McBride noted that the Fed is combating the economy, but some observers worry that its bigger-than-expected move might be opening the door to inflation, a concern which has pushed mortgage rates up slightly since the Fed's most recent move.

According to BankRate.com, the average 30-year fixed rate mortgage in the country currently carries a rate of 6.4%, which represents a reversal of course. The average mortgage rate had dropped below that level, to roughly 6.25%, in the two weeks leading up to the Fed announcement Sept. 18 that it was cutting the target for the federal funds rate to 4.75% from 5.25%.

McBride noted that the Fed's rate cut is bad news for long-term savers, as rates on certificates of deposit maturing in two or more years have fallen, while short-term rates have remained steady. This erases any risk premium that a saver gets for tying up money for a longer stretch of time.

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Falling home prices could dent economy

Just as rising home prices helped fuel the economic expansion of the past six years by making people wealthier, falling home prices could put a big dent in economic growth in the next few years by making them poorer.

At this point, few economists expect the economy to sink into a recession, but almost all of them agree that consumer spending would slow, perhaps significantly, if home prices were to fall.

With the number of excess homes rising amid falling demand, the negatives in the housing market will "continue putting downward pressure on prices," said Seamus Symth, an economist for Goldman Sachs, who says home prices were plunging at a 9% annual rate in the most recent data. Goldman expects home prices to fall 7% this year and another 7% next year.

The path of home prices could be the key to whether the economy grows or stalls.
"A big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices," San Francisco Federal Reserve Bank President Janet Yellen said in a recent speech. "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant."

Economists are forecasting that home prices will decline more than 5% this year and nearly 4% next year, according to the latest survey by Blue Chip Economic Indicators. Those same economists expect consumer spending to slow from 3.1% last year to 2.8% this year and 2.3% next year.

While a cumulative 8% drop in home prices (after nearly doubling in the previous six years) doesn't sound so ominous, such a decline would be the largest since the Great Depression.

Because most owners are reluctant to sell at a loss unless they are forced to, it's extremely unusual to see nominal home prices fall. In economists' jargon, home prices are "sticky" on the downside, but not on the upside.

By comparison, prices in the stock market adjust quickly to new perceptions about values, as investors take their losses and move on. During market corrections, the volume of shares traded doesn't fall, because the market quickly finds a new equilibrium between supply and demand.
The housing market is completely different. Sellers don't quickly adjust their prices to a new market reality. And because prices don't fall to bring demand into balance with supply, the volume of houses sold plunges during a correction. Home sales are now down 23% from the peak more than two years ago. The housing market can take years to find an equilibrium. In most housing corrections, sales remain very weak until excess supply is worked off. Prices can be flat for years.

So why are prices falling now? There's every reason to believe that supply and demand are getting even further out of balance. The number of vacant homes is at a record level, and more new homes are coming on the market every day. Foreclosures are rising, further increasing supply. More adjustable-rate mortgages will reset to a higher monthly payment in coming months, pressuring more homeowners to sell or default.

At the same time, the rationing of credit is reducing demand. The subprime and Alt-A mortgage markets, which represented about 40% of mortgages last year, have almost completely dried up. Lenders are increasing their standards for approving a loan, and interest rates for jumbo loans have risen substantially.

The difficulties in the mortgage market will not only depress home sales, it will also reduce consumer spending. In recent years, consumers have taken advantage of the mortgage market to withdraw and spend some of the equity they've built up in their homes,
"We've given people the ability to spend more, and it's going away now," said Paul Kasriel, chief economist for Northern Trust.

Economists can't agree on how much spending has been boosted by mortgage-equity extraction, also known as MEW.

Some theorize that each additional dollar of wealth (from appreciation in assets such as housing or stocks) boosts spending by about 3 cents. By that account, the $8.1 trillion gain in real estate values since 2001 added about $243 billion to consumer spending over those six years, an insignificant amount compared with the $46 trillion they've spent.

But other economists say extra housing wealth is more likely to be spent than extra stock market wealth. Former Fed chairman Alan Greenspan and Fed economist James Kennedy concluded in a study published in 2005 that consumers spent about half of what they took out of their homes, and invested the other half in home improvements.

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The number of mortgage loans entering the foreclosure process in the second quarter set another record, according to the latest data from the Mortgage

According to the group's quarterly delinquency survey, a seasonally adjusted 0.65% of loans on one- to four-unit residential properties entered the foreclosure process during the period, the highest level in the survey's 55-year history. In the first quarter, when the previous record was set, 0.58% of loans entered the process; a year ago, 0.43% entered the process.

The delinquency survey covers more than 44 million mortgages, meaning more than 286,000 loans entered the foreclosure process during the quarter. Coverage of home buying and selling, housing prices, mortgage information and home improvement

Driving the numbers were the states of California, Florida, Nevada and Arizona, said Doug Duncan, MBA's chief economist and senior vice president of research and business development, in a news release.

"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty-four states had decreases in their rates of new foreclosure and the increases were very modest in the states with increases, other than those four," Duncan said.

Duncan said there was a "clear divergence" in performance between fixed-rate and adjustable-rate mortgages because of the impact that rate resets have.

"While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed- rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans," he said.

Less clear is whether rate increases in subprime ARMs are causing major problems for those four key states, or whether local market conditions that are causing prices to drop are the main culprit because the lower prices are making it more difficult for people in unaffordable loans to refinance, said Jay Brinkmann, the MBA's vice president of research and economics, in a telephone interview.

California has 17% of the subprime ARMs in the country and more than 19% of the foreclosure starts on subprime ARMs. California, Florida, Nevada and Arizona have more than one-third of the country's subprime ARMs and more than one-third of the foreclosure starts on subprime ARMs.

Home prices have dropped in all four states, and 52 of the 59 metropolitan areas in the four states saw home price declines during the second quarter, according to the Office of Federal Housing Enterprise Oversight, the MBA said. The inventory of new homes for sale in the Western region hit an all-time high at the end of the second quarter, and Florida is dealing with a glut of condo supply, Duncan said.

These are also markets that have experienced a high share of investor loans, Duncan said. The share of non-owner-occupied loans that are 90 days or more past due or in foreclosure, as of June 30, was 32% in Nevada, 25% in Florida, 26% in Arizona and 21% in California. Comparatively, 13% of these loans were in default in the rest of the country.

"Whatever happens in those states is going to drive the national numbers but they don't represent national performance," Brinkmann said.

More statistics
According to the survey, 1.40% of all outstanding loans were somewhere in the foreclosure process during the second quarter, up from 1.28% in the first quarter and 0.99% a year ago.
Greatly factoring into those figures are markets such as Ohio, where mortgages that are 90 days or more past due or in foreclosure was still more than twice the national average, Duncan said. In addition, 1% of mortgages in Michigan entered the foreclosure process in the second quarter, and nearby states including Indiana, Illinois, Kentucky, Tennessee and Pennsylvania are also seeing foreclosure problems, he added.

"While Michigan's problems continue to escalate, however, Ohio's have shown signs of leveling off, albeit at a high level," Duncan said in the release.

The delinquency rate for mortgages on one- to four-unit proprieties was 5.12% in the second quarter, up from 4.84% in the first quarter and 4.39% a year ago.

Looking ahead
The freeze up and turmoil in the mortgage markets that has occurred since June 30 will have an effect on these numbers in the coming quarters, Duncan said during a conference call with reporters.

Because credit availability has been constrained, refinance options are limited for borrowers, curtailing opportunities for homeowners on the margin of being in trouble, he said.
Due in part to the turmoil -- and possibly the affect of resets in 2/28 ARMs that were originated in 2005 and 2006 -- the MBA suspects that the peak in foreclosures and delinquencies hasn't yet been reached and won't until the next two to four quarters, Duncan said.

A research note by Lehman Brothers Economics said that the MBA results are consistent with the view that "the housing recession looks far from over," adding that tighter lending standards and the shrinking availability of credit should cause the performance of mortgage loans to get worse.

"As subprime ARMs continue to reset to higher rates, many borrowers will be forced to default and in some cases ultimately foreclose," the note read. "Higher foreclosures will add to already bloated inventory of homes, extending the housing recession."

Another note from Ian Shepherdson, chief U.S. economist for High Frequency Economics, pointed out the increase in the number of subprime loans compared with 2002, explaining that the number of subprime delinquencies is magnified as a result.

According to the MBA report, the delinquency rate for subprime loans was 14.82% in the second quarter, up from 13.77% in the first quarter. But while in the second quarter of 2002 there were 1.19 million subprime loans outstanding, today there are about 5.9 million, Shepherdson said.

"That's why the problem now is so much worse despite similar headline delinquency rates. Also, note that the rise in delinquencies this time is mostly due to resetting ARMs; the unemployment rate has not moved up. In '02, job losses did all the damage."

"So what happens now if unemployment goes up as resets increase too? Well, you ain't seen nothing yet," he wrote.

The MBA expects the Federal Reserve to cut rates a quarter percentage point in the next two meetings, a response to projections of weaker economic growth and higher unemployment, Duncan said.

He also commented that the rise in delinquencies and foreclosures has been the tradeoff to the steep rise in homeownership, which has come about after a major policy push to create more homeowners. He also pointed out that 35% of people who own a home don't have a mortgage.
-Marketwatch

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Has Bank of America's CEO saved the credit markets?

Sentiment is growing that Bank of America Corp.'s Kenneth Lewis may have won a place in the pantheon of great Wall Street titans by using his financial clout to help the country avoid economic ruin.

In some circles, Bank of America's is being seen as critical to the end of the Panic of 2007.

On Monday, The Wall Street Journal crowed that "the deal at once helped stabilize the credit markets and gave Bank of America a foothold in the nation's biggest mortgage lender." The move also was a tonic for a company that was driving "depositors into branches to withdraw funds and [sending its] stock tumbling," Merrill Lynch wrote in a negative credit report that mentioned the possibility of bankruptcy

"The infusion also may help to reassure investors that the mortgage market is safe after rising default rates sparked a global credit crunch," Bloomberg said. In Europe, Agence France-Presse observed that Lewis "boosted confidence about an easing of the credit squeeze," and that this was "a sign of confidence that the storm in the mortgage sector may be ending."

The B. of A. move comes exactly a century after J.P. Morgan -- back then, the man and the bank were the same -- helped stem the Panic of 1907. That year, depositors made a run on two U.S. banks. Morgan responded by convincing U.S. Treasury Secretary George Cotelyou to inject $25 million into the banking system. Sound familiar?

Morgan also created a $3 million pool to save Trust Co. of America. Responding to pleas from the New York Stock Exchange, Morgan, leading a consortium of bankers, pledged another $25 million to back the exchange. He also bailed out New York City by backing a $30 million bond issue.

In today's terms, that would be about $600 million for the banking system, $71 million to Trust Co. and a $631 million bond issue. Morgan didn't put up all the funds, but he organized the relief.
His reward? Morgan helped the economy, and in turn his own assets. Brokers on the floor of the NYSE cheered his action to help the exchange so loudly that he could hear the roar from his office across the street at 14 Wall St. A thankful Washington allowed him to buy a railroad worth about $16.7 billion today for $1.1 billion.

Morgan isn't alone in coming to the rescue during a financial crisis. Other financial titans have come forward to offer help, albeit smaller in scale. Recently, Warren Buffett rescued Salomon Brothers in 1991, and a consortium of banks rallied by the New York Federal Reserve bailed out Long-Term Capital Management by putting up $3.6 billion in 1998.

U.S. banks also stepped in to buy flailing savings and loan thrifts in the late 1980s and '90s. They usually scooped up assets as discount prices.

'Bank of America was just looking for a bargain, and essentially got one.'
— Charles Geisst, professor and author

This idea of bailing out by bargain-shopping is really what's at work here with Lewis. "Bank of America was just looking for a bargain, and essentially got one," said Charles Geisst, a history professor at Manhattan College and author of several finance books, including "Wall Street: A History, From Its Beginnings to the Fall of Enron."

Geisst believes that the Countrywide acquisition didn't even really stabilize the mortgage markets, as some have suggested. The market for mortgage-backed securities is still impaired, he commented.

This leaves Lewis as more of a shrewd opportunist than patriotic investor. He and B. of A., after all, have been pining for a piece of Countrywide for more than five years.

Not only did the executive get the stock at a deep discount of nearly 50%, but also the shares pay a 7.25% dividend. What's more, the investment immediately returned a paper profit of more than $400 million after the deal was announced and Countrywide's stock soared.

For those longing for a Wall Street baron to save the markets like the great J.P. Morgan, there may be opportunity yet.

"We will get some rescues," Geisst said, pointing to the decision by B. of A., Citigroup Inc. to borrow $500 million each from the Fed's discount window.

"Those four going to the discount window is like someone from the Upper East Side going to Wal-Mart," Geisst added. "They were probably fronting in the marketplace for an institution that was really in trouble."

Maybe there's a modern-day Morgan out there. We can all pitch in and buy him a railroad.

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100% Financing with bad credit in 2007

A guide to 100% Financing with bad credit in 2007 (Background)

At the end of 2006 and the start of 2007 the mortgage and real estate industry as a whole experienced the biggest downward spiral in decades. The real estate market finally peaked after several years of record breaking rising values. As always happens in the real estate market, the values rose to a point beyond that which the average home buyer could tolerate. Investors were not able to sell at the same profits, and buyers felt costs reached a limit that was unattainable and new home buying began to cool.

In the financial arena we had several years of record mortgage origination volumes of which sub-prime mortgages, also known as bad credit mortgages, made a huge percentage of. Lenders were loosening guidelines and creating ever more aggressive programs to try to take advantage of the booming market. This led to many bad credit consumers accepting a loan program that was not in their best interest. The most popular and notorious loan was the 2 year ARM. With a teaser rate that allowed affordable monthly payments.. when these loans adjusted in 2007 we saw many people in loans that they could no longer afford. This cause a massive amount of foreclosure and loan defaults to take place. Lenders were taking bottom line hits in the millions that forced them to declare bankruptcy and shut their doors. This combined with the scrutiny lenders received from Government agency caused some of the biggest players in the industry to leave the loan origination arena. This had a severely negative trickling affect as the remaining lenders faced some very tough decisions. They saw that they could no longer originate loans as they had In the past.

The number of sub-prime lenders that closed doors was astounding. For the remaining lenders in the industry and few the new ones that would pop up in 2007, tighter underwriting standards prevailed. No more could the crazy loose guidelines from years past be allowed. Lenders had to really take a hard look at if a buyer was going to be able to repay their loan, even after an adjustment on an ARM loan took place. They needed to verify more information about the borrower’s history and had look deeper into their spending habits to qualify them for a loan. This led to far fewer loans being originated and fewer sub-prime buyers being able to purchase their first home. Also due to the stricter guidelines those borrowers that had originally been qualified for a loan and placed into a short term (band-aid) ARM loan were not able to qualify for a refinance when the adjustments came due. This forced many people into foreclosure situations.

What we had by the end of the first quarter of 2007 was a perfect storm in the sub-prime lending business and real estate markets. With an oversupply of inventory in real estate coupled with the fact that lenders were not willing to originate loans to the bulk of the buyers.. situations became bleak quickly. Thousands upon thousands of jobs were lost. Realtors, Real estate brokers, Account Executives, Processors, Underwriters, Mortgage Brokers, and loan officers all lost jobs. With fewer lenders and Broker business left operating many of these people had to leave the industry for a new career.

The few that remained were left to pick up the pieces and forge a responsible path for the future. With Mortgage Brokers taking a media beating the life of the mortgage broker and loan originator in 2007 continues to be a difficult one.

In part two of this article we will examine living with the new aftermath in bad credit mortgages in 2007 and some things all potential buyers need to know in order to buy their first home or refinance into a better loan.

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Mortgage lender's shares jump in morning trading

In a move that could help the largest U.S. mortgage lender survive a crisis that's rocking the home-loan industry, Bank of America . The nonvoting securities pay an annual interest rate of 7.25%.


They can be converted into common stock at $18 a share. If that happens, Charlotte, N.C.-based Bank of America won't be able to trade the stock for 18 months after conversion, the two companies said in a statement.

Separately, Wachovia upgraded Countrywide to market perform from underperform, citing the Bank of America investment.

"We believe that Countrywide Financial still faces many near-term challenges. But the influx of cash and capital reduces the potential for a catastrophic liquidity event, in our view," Wachovia told clients early Thursday. "Recent actions also suggest that the Federal Reserve is willing to provide liquidity despite lingering inflation concerns."

Countrywide's shares have been hammered this month as a broadening crisis in the mortgage business cut off the company's access to its usual sources of borrowing in the market.
Countrywide had to tap an $11.5 billion loan facility from 40 banks last week and said it was planning to funnel most of its mortgage origination through its bank. But then Countrywide had to head off a run on its bank as some depositors withdrew their savings.

"We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets," said Kenneth Lewis, Bank of America's chief executive, in a statement. "In the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets."

Bank of America's decision also highlights the importance of Countrywide's role in providing money for home purchases across the U.S., Lewis added, noting that Countrywide services the mortgages of one in seven American households.

"Bank of America's investment in Countrywide represents a vote of confidence and strengthens our balance sheet, enabling us to position Countrywide for future growth and success," said Angelo Mozilo, chief executive of Countrywide, in the statement.

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Lehman shuts BNC Mortgage unit, cuts 1,200 jobs

SAN FRANCISCO (MarketWatch) -- Lehman Brothers said Wednesday that it's shutting its subprime-mortgage unit BNC Mortgage LLC and firing 1,200 people, becoming the latest company to stop offering home loans to less-creditworthy borrowers. BNC was a top-20 subprime mortgage lender in 2006, originating more than $14 billion worth of home loans, according to industry publication Inside B&C Lending.

Lehman said it will keep offering mortgages through Aurora Loan Services LLC, another unit that focuses on so-called Alt-A home loans. Alt-A mortgages are offered to more-creditworthy borrowers, but they often require less documentation.
The closure of BNC will affect roughly 1,200 employees in 23 locations in the U.S., Lehman

The job cuts are the latest to hit the mortgage industry. Home loan companies have eliminated more than 25,000 positions in August alone.

Wednesday's move will cost Lehman more than $50 million, it said. Charges, including severance, real estate and technology costs, will total roughly $25 million after taxes, Lehman said. Another $27 million in costs would stem from the after-tax write-off of goodwill, the company added.

"Market conditions have necessitated a substantial reduction in ... resources and capacity in the subprime space," Lehman said in a statement.

Lehman shares rose 1.7% to close at $58.54 on Wednesday. The stock is down roughly 24% so far this year.

After mortgage lenders originate loans, they often package them up as mortgage-backed securities and sell them to institutional investors such as hedge funds, insurers, banks and pension funds.

During the recent housing boom, the securitization of subprime mortgages and other home loans was a lucrative business for investments banks. It became so attractive that some firms acquired subprime mortgage lenders so they could originate loans in-house to package up and sell. bought Saxon Capital for more than $700 million in December.

However, rising delinquencies on subprime mortgages have triggered a credit crunch in the mortgage business. More than 50 lenders have already gone bankrupt and investors in the secondary mortgage market have stopped buying securities backed by subprime loans.
That's undermined one of the main reasons why these investment banks acquired subprime mortgage originators.

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