IMPAC’s CEO Speaks Out on New Century

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The Orange County Register has a good article based around an interview with Joseph Tomkinson, the CEO of Impac, one of the nation’s largest Alt-A lenders. In the article Mr. Tomkinson gives a good look at the current roiling of the mortgage market from the mortgage company’s perspective. He believes that Wall Street is overreacting to the recent surge in mortgage defaults in the subrpime market.

"Do I think that the investment banks are overreacting? They’re throwing the baby out with the bathwater," says Tomkinson…

He agreed, though, that some subprime lenders have been accepting riskier and riskier loans and that a frenzy of lending to risky borrowers making little or no down payments on their homes had to be curtailed.

"However, that doesn’t mean (the lending industry is) going to implode, that lenders can’t manage what they’re going through now," he said.

He argues that companies like New Century can handle the rising defaults and mitigate those losses through tightening of lending standards, the ability of delinquent borrowers to bring their accounts current, and the bank’s ability to recapture some of its losses through the sale of foreclosed property.

About half of all borrowers who are 60 days behind in their house payments or less manage to resume making all their payments on time, Tomkinson said. When they fail to "cure" their defaults and end up losing the home, the lender recovers most of that default by selling the residence, he said.

"If you have $8 billion in early payment defaults, you’re not going to lose that amount," he said. "You might lose 10 percent of that."

He also argues that the rise in delinquencies, while much higher than in recent years, are still below historical delinquency rates in the subprime market.

I agree with Mr. Tomkinson that the media, regulators and legislators love a good frenzy, Wall Street banks reacted quickly once they smelled blood in the water and that much of this is over-blown theatrics; however, it remains to be seen whether these companies can weather the storm of rising defaults. Remember, we’re only 3 months in to a year where over a trillion dollars in mortgages are set to become adjustable. Can the New Century’s of the world sustain a whole year of growing defaults? Apparently Wall Street has its doubts.

Where I have problems with his argument is in his assertion that Impac, while marginally affected by the delinquency issue, is more a victim of bad press than of bad lending practice. He contends that his Alt-A loans are written to people with better credit than subprime, and therefore have less risk. However, in one of my recent posts I looked at my company’s production for Alt-A and found that 40% of Alt-A borrowers were in either exotic or second mortgages.

While a small sample size, these numbers are probably indicative of other lenders across the country. These exotic mortgages (interest only, pay-option) and seconds carry a much higher risk profile, especially as they begin to adjust and/or recast.

Alt-A borrowers also had more access to 100% financing and stated-income loans, where they didn’t need to document their income. These stated-income guidelines would allow them to borrow more money than they could otherwise qualify for with a fully documented loan, and make their housing payment a much larger percentage of their income.

These two risk factors, exotic mortgages and stated income must put pressure on the loan portfolio of Impac, even if they aren’t subprime borrowers.