With demand for home loans falling sharply, competition among lenders may be getting out of hand, industry leaders and regulators are warning.
They say that lenders, especially thrifts, are offering loans at rates that are so low as to render the products unprofitable. At the same time, concerns about credit quality are mounting.
The western region of the Office of Thrift Supervision, which oversees many of nation's largest thrifts, last week sent out a warning letter about adjustable mortgages with heavily discounted initial rates. The agency fears that borrowers will be unable to keep pace with payments as rates rise.
Cutting Corners
Meanwhile, the chairman of Freddie Mac, Leland Brendsel, is warning that lenders may be cutting corners in credit reviews.
As lenders slash costs to cope with the shrinking market, some "might be attempting to reduce costs by not spending the time on underwriting...and normal due diligence in doing loans," Mr. Brendsel said in an interview last week.
The warnings come amid predictions that nationwide mortgage originations will fall to less than $700 billion this year, from a record $1 billion in 1993, because of higher interest rates.
Adjustables Gaining Share
Of the business that remains, an increasing portion is in adjustable-rate mortgages. As is often the case in times of rising rates, consumers have been drawn by the relatively low initial rates on adjustables.
By May, 36% of new mortgages carried adjustable rates, up from 31% in April.
To take advantage of the trend, thrifts have been marketing adjustables aggressively.
Mr. Brendsel maintains that the rates offered on adjustables are unprofitable and can't be sustained.
Angelo Mozilo, vice chairman of the large Countrywide Credit Industries, goes so far as to say that the thrift industry may be headed for another crisis.
"They're getting themselves back into the same situation as in the 1980s," Mr. Mozilo said. "It cost the taxpayers billions of dollars. I think it's just the same old nonsense."
The OTS letter warns that qualifying borrowers at introductory rate significantly below the fully indexed rate is "unsafe and unsound."
Other red flags: abnormally low lifetime caps, high loan-to-value ratios, and negative amortization. The last-mentioned can cause a borrower's outstanding balance to increase in times of rising rates, possibly wiping out the borrower's equity.
Examiners Alerted
OTS examiners will be focusing on these issues in exams, the letter adds.
Freddie Mac -- formally the Federal Home Loan Mortgage Corp. -- has stepped up its own review of the loans it buys, particularly from companies that have a history of making bad loans, Mr. Brendsel said.
Fannie Mae -- the Federal National Mortgage Association -- appears to be playing down any new credit risks.
"The sense of competition is heightened because there's a smaller pie," said Donna Callejon, a senior vice president of the agency.
But those who have been in the market for many years know the business is cyclical and won't jeopardize their relationship with borrowers or investors, Ms. Callejon said.
The key, said Charles Rinehart, chairman of Home Savings of America, is how the loans are underwritten. And he thinks most thrifts have been doing a good job.
"I don't see anything in the market today that I think is going to cause widespread devastation of S&Ls," Mr. Rinehart said. Nevertheless, he said, "I think some may be doing some dumb things that may hurt their margins."
