The ongoing saga of a correspondent loan

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In an earlier post I explained how the meltdown from New Century would not only send shock waves through Wall Street, but it would also likely bankrupt many small "correspondent" lenders who had funded any number of loans with the expectation that New Century would purchase them only to learn that they were not going to be bought. There suddenly wasn’t a buyer for these subprime loans.

Once a correspondent lender learns they can’t sell a loan they take it to the "scratch and dent" market; where just like the name suggests, buyers purchase loans that don’t go to conventional lenders at a substantial discount. Normally these loans sell anywhere from 97 to 90 cents on the dollar. Lately though, because of all of the loans that are out there looking for homes that were supposed to go to New Century loans are being bought at 80-90 cents on the dollar.

Think about that for a moment. 80 cents on the dollar. If you have a $500,000 loan (not uncommon in CA) and you have to sell it for 80 cents on the dollar you are looking at a $100,000 loss – JUST ON THAT LOAN! Now take 4 to 6 loans just like that. How many small businesses do you know that can sustain a one time charge of $100,000 unexpectedly? Not many.

My company has one such loan. We are looking at selling it for 87 cents on the dollar. That will mean we have to take a one-time charge of approximately $55,000 to settle the loan. That is probably a half-year worth of profit lost on one loan – and it has to be paid in cash.

We will survive, we are going to use our line of credit to pay the loan off and then pay that amount back slowly. It will hurt our liquidity, our net worth and put a large debt burden on our company – but at least we will survive. If we had any more than one our company would be in serious trouble.

I hope that the media follows up on this part of the story – there are so many small bankers that are going to be under tremendous pressure to survive. The loan buy backs, the increased competition, the falling home prices, the tighter underwriting guidelines are all going to be hurdles that the small mortgage banker needs to overcome. I hope that they can.