Regulators order another subprime company to stop operations

By Kimberly Blanton
GLOBE STAFF

The problems in the nation’s subprime mortgage industry continued to ripple through the economy yesterday, as Massachusetts foreclosures hit another high, the stock market wavered up and down before ultimately finishing in positive territory, and some borrowers discovered that loans they had agreed to were never funded.

Shares of H&R Block Inc., owner of the largest subprime lender in the state, Option One Mortgage Corp. of Irvine, Calif., have fallen 20 percent in the last six weeks as the number of subprime borrowers who are late in making payments on their mortgages has grown. Yesterday, H&R Block said it still expects to sell the mortgage unit for $1.3 billion. Earlier in the day, UBS analyst Kelly Flynn issued a report stating that the price was ‘‘unattainable,’’ and said the company ‘‘would be lucky to avoid having to shut down operations.’’

Steven Antonakes, commissioner of the Massachusetts Division of Banks, would not comment yesterday on Option One specifically. ‘‘There are a number of companies where we’re monitoring the liquidity and their pipeline on a daily basis,’’ he said. The division on Tuesday ordered the state’s third-biggest subprime lender, New Century Financial Corp., to halt operations after the company failed to fund some borrowers’ mortgages.

‘‘It’s a fluid situation,’’ he said about the industry’s problems, ‘‘and it’s not over yet.’’

Subprime lenders in recent years provided hundreds of billions of dollars in credit, often to borrowers with less-than-stellar credit ratings. It became extremely easy to obtain exotic mortgages with little or no down payment, but borrowers are defaulting at an increasing rate as housing prices fall and interest rates rise. Loan brokers and real estate specialists said Massachusetts was fertile ground for subprime loans, which let more people buy into one of the most expensive real estate markets in the nation.

But many borrowers have been unable to make their payments, driving foreclosures in the state to record levels. In Massachusetts last month, 1,005 properties were auctioned in foreclosure, according to the Warren Group, a Boston real estate research and publishing firm. Property auctions were above 1,000 in both January and February, a sharp escalation from about 650 a month, on average, in the last half of 2005.

Initial foreclosure filings also rose sharply last month to 2,424, nearly double the levels of a year ago. Lenders typically initiate foreclosure proceedings when borrowers are more than 30 days behind in their payments. Not all foreclosure proceedings end with the property being auctioned off, as many borrowers work out their problems by refinancing or selling.

A recent study by the Federal Reserve determined that subprime loans were the primary cause of rising foreclosure filings in Massachusetts.
The increase in foreclosure filings ‘‘has to continue for awhile, because there’s a lot of shaky loans out there,’’ and real estate values are falling, Warren’s research analyst, Alan Pasnik said.

Antonakes said New Century has failed to fund about 29 Massachusetts mortgages that have already closed and as many as 400 that were still in the pipeline.

The New York Stock Exchange recently suspended trading of New Century’s stock, which had dropped by half, from a high above $40 per share late last year, as the company disclosed growing financial problems and rising delinquencies in its subprime portfolio. New York, New Jersey, and New Hampshire have also issued orders for New Century to cease operations.

Massachusetts also ordered two smaller subprime lenders, Old Commonwealth Mortgage LLC of New York State and Apex Financial Group Inc. of Florida, to cease operations in the state. Apex failed to disclose regulatory actions in Georgia and Alabama, the state said, but Apex senior vice president Terry Trekas said the company was attempting to resolve the issue, which involved mortgage brokers’ licensing of some of its mortgage brokers in those states.

‘‘Massachusetts is a great state, and we don’t want to lose that’’ market, Trekas said. A telephone operator at Old Commonwealth, who refused to provide his name, said the company would not comment on the Massachusetts action.

Medford homeowner Elaine Diettrich was temporarily caught up in the turmoil unfolding at New Century. ‘‘It was very anxious, shall we say,’’ she said.

Diettrich said she has tarnished credit but needed to extract some $45,000 in equity to work on her 10-room house, purchased in 1995, because her small business — Cozy Corner Ceramics — didn’t generate much income in the past two months. She lined up a loan with New Century less than two weeks ago. On Friday, her broker at New Boston Mortgage Corp. called to say the funds had not come through on the loan, which had closed a week earlier.

Tom Marroni, New Boston’s president in Andover, said his contacts at New Century were ‘‘in the dark’’ about the company’s funding issues. He said he was forced to make calls on behalf of Diettrich and another customer in a similar situation to get the loans funded.

‘‘They should’ve given me more heads-up before I funneled loans in my pipeline in their direction,’’ Marroni said. ‘‘I do not fault the account reps because I do not believe upper management gave them the truth.’’

New Century declined to comment yesterday.