Accredited Home Lenders' filing a subprime 'obituary'
— -- The filing is a Reader's Digest version of how subprime loans went from lucrative sources of returns to tripping up financial markets and threatening the survival of many of the companies that helped fuel the housing boom.
In explaining why it may no longer be able to operate as a "going concern," Accredited details how the subprime mortgage market has tumbled around it. "It's a well-written obituary on the industry and the liquidity problems facing it," says Matthew Howlett, analyst at Fox-Pitt Kelton. The nearly 250-page filing gives lurid particulars on:
•The subprime implosion. Rampant competition for customers in the third quarter of 2006 prompted lenders to get overly aggressive and offer loans to less-qualified home buyers. Then subprime lenders were squeezed when investors who bought the loans demanded lower prices for the added risk. Next, the riskier loans defaulted more frequently, prompting banks that bought the loans to force the subprime companies to take them back. These trends worsened in the first and second quarters of 2007.
By mid-June, more than 50 companies in the subprime industry had failed. Ratings agencies severely downgraded hundreds of mortgage-backed securities on June 10, further eroding their value.
•The company's struggles. Accredited says it could be forced to stop making loans and face a filing for bankruptcy protection unless the value of its mortgages recovers or it gets new sources of cash. HSBC and CIT Group, which bought 29.9% and 12.1%, respectively, of Accredited's loans in 2006, are no longer buying subprime loans. Meanwhile, the company says employee morale is "steeply declining," and that dealing with the problem of keeping key positions filled is "extremely disruptive."
It's a dramatic departure from Accredited's 2005 filing. The 2006 risk-factors section doubled in size to 24 pages, the words "going concern," "margin call" and "waiver" appear nine, 27 and 34 times, respectively, but not once in the 2005 filing, says John Hand, accounting professor at the University of North Carolina.
