For instance, in the majority of its transactions Mortgage Lenders Network (MLN) doesn't lend its own money. Like other subprime lenders they access lines of credit from other financial institutions. Sometimes called "warehouse lenders". After subprime loans are made, they're bundled and bought by securities firms to be packaged as bonds. Both warehouse lenders and subprime lenders profit from the sale. Sub-prime lenders either continue to service the mortgages (as in, collect payments and levy fees) or sell them to other subprime servicers.

Until recently, financial institutions were throwing money at subprime lenders. And investors were snapping up high rate, fee enhanced, subprime paper. But borrowers who bit off more subprime than they could chew, believing housing values would continue to rise at the same pace forever and cover their loans, are becoming delinquent-- and defaulting-- at an alarming rate. Concurrently, subprime lenders have been scraping the bottom of the borrower barrel and making riskier and riskier loans. Bad loans are being bounced back to originators, investors are spooked, warehouse lenders are cutting credit lines, and new regulations are in the wind. Subprimes are shaking out.

(Incidentally, subprime pros have tried for years to change the common usage "subprime" to "nonconforming". But the more upscale sobriquet hasn't stuck. Possibly because too many nonconformists have reps for predatory lending and shark tactic mortgage servicing. As well as for pushing loan products known as "exotic". Those wacky exercises in nonexistent lending standards that helped pump an epidemic of mortgage fraud and oh yeah-- the speculative real estate bubble now leaking air like a mutha.)

Mortgage Lenders Network is the latest but not the greatest subprime to SHAKE. The largest to date is Ameriquest Mortgage. On the eve of 2006, California based Ameriquest was the most beautiful subprime lender in the whole USA. Sure, they'd agreed to pay $325 million to settle a 49 state investigation into their lending practices. But the agreement carried no requirement to fess up to a company policy of bait & switch loan terms, falsifying borrowers' financial worth, or pressuring appraisers to supersize property values. All such mortgage fraud-esque activities were merely the result of overzealous sales associates in regional offices. In 49 states. As for the $325 mil penalty (established by a committee headed by attorney generals from New York, Iowa, Illinois, California and Washington) it was a mere bagatelle for Ameriquest. Whose parent company, ACC Capital Holdings Corp. did $82.7 billion of sub-prime biz in 2004 alone.

Suspicious minds on the political left speculated Ameriquest got Predatory Penalty Lite due to founder Roland Arnall's Republican ties. Over a period of several years, Arnall and his wife raised some $12 million for President Bush and projects dear to his heart. They also kicked in $750,000 for Bush's 2004 inaugural bash. In late 2005, President Bush appointed Roland Arnall ambassador to the Netherlands. Still, the Arnalls are major contributors to both parties; they go with the power flow. And it's hard to imagine Dubya getting on the honker to tell a bunch of state attorney generals, some of whom were reform-minded Democrats, to go easy on a subprime Republican cash cow.

After Roland Arnall was made an ambassador he disengaged himself from Ameriquest. Not a minute too soon. By the end of 2006, Ameriquest had sunk to 7th in the subprime world. ACC Capital Holdings is now shaking out into smaller pieces. In mid January J. P. Morgan was shopping Ameriquest to bond hedge funds. In a New York Post article (Hedge Funds in Bidding For Ameriquest) a hedge pro waxed rhetorical: "If (Ameriquest) is cheap enough, why not?". Adding that the Ameriquest penalty agreement "removed a significant barrier for a possible buyer."

Hopefully, the tens of thousands of burned borrowers slated to receive restitution from Ameriquest's penalty payout have already gotten their couple-hundred-dollar piece of the subprime action.

Speaking of action, Mortgage Lenders Network is shaking out double time. Just a few months ago they were talking expansion. Their new corporate headquarters in Wallingford, Connecticut was set for a taxpayer boost, arranged by the state Department of Economic and Community Development (DECD).* Throughout 2006, public officials in Connecticut, from top levels on down, eulogized MLN for agreeing to stay in the state. A year earlier MLN had complained Connecticut didn't do enough to enhance the business environment. So MLN marketed itself to Massachusetts. The Bay State was eager to buy. But when Conn offered extensive tax breaks and a $4 million loan MLN decided to stay. The loan, at 2 percent interest over 10 years, would be backed by the State Bond Commission and was intended for land purchase. But in June 2006, the DECD requested the agreement be amended so the loan could cover acquisition of equipment and related working capital costs. The loan hinged on the promise MLN would retain 600 existing jobs and create 470 more by 2011. If the jobs materialized, almost 40 percent of the loan would be forgiven.

Apparently Connecticut officials concerned with development don't read real estate industry publications. Or they might have told MLN "Go Mass!" By 2005 the buzz re subprime lending had turned doomy. Even professional Panglosses acknowledged an itsy bitsy correction was coming. More sober souls spoke of employment contractions in the industry and warned that as the boom waned, subprime lenders were pushing ever more bizarre and shaky loan products. On October 26th, 2005, the Mortgage Bankers Association (MBA) reported a nationwide slowdown in originations and predicted the decline would continue through 2006-- a prediction recently extended into 2008.

On October 31st of 2005, Mitchell L. Heffernan, the president of MLN seemed to shrug off the MBA bad, as he described in an interview with Business New Haven, how MLN had "evolved" from servicing folks with "tainted credit" to those who had good credit but were "looking for terms and conditions different from the conforming market". These borrowers were called "Alt-A". In company statements, MLN's projections for 2006 were rosy and continued to be so all year. As the plan for the government enhanced expansion progressed, MLN issued employment recruitment announcements. On September 28th, MLN touted expansions not only in Connecticut, but in Arizona, Georgia, and Pennsylvania. When rumors surfaced in early December that MLN was in trouble, the company announced MLN was "actively accepting loan submissions" and "continues its growth and expansion".

One month later, in the first week of January 2007, MLN announced that during the prior 2 months lending conditions had "deteriorated dramatically" and MLN was ceasing to fund loans or accept applications. They were also laying off hundreds of employees, in Connecticut and other states. MLN executive vice prez James Pedrick called some of the lay offs "furloughs". (No mention was made whether chocolate, stockings and condoms were issued to the furloughed employees.) However, Pedrick claimed MLN would continue doing business in Connecticut (albeit in a smaller incarnation) and planned to provide the promised new jobs by 2011 (albeit atop a smaller job base) and expressed hope that the 4 million dollar state loan would still be delivered.

Employees weren't the only ones furloughed due to the dramatic deterioration of lending conditions. Borrowers in a number of states found themselves one loan short of an approved mortgage. This development riled Connecticut's Department of Banking. They opened an investigate into MLN. A few days later, Lehman Brothers, one of MLN's Wall Street warehouse lenders (GMAC's Residential Funding Corp., Goldman Sachs, Merrill Lynch and the Royal Bank of Scotland are also MLN warehouse lenders) decided to cover the loans MLN had granted. Some say Lehman may also buy MLN's wholesale unit; the largest part of the company and the one hardest hit by the dramatic deterioration of lending conditions.

What were those conditions? According to MLN President Mitch Heffernan, as quoted in American Banker on January 11th, the problems besetting much of the subprime world weren't the main culprit in the case of MLN. The problem was with an MLN loan product Heffernan calls "prime". In October, in an attempt to balance out their subprime defaults, MLN began marketing a new loan product called A-plus-plus. (Presumably a double plus good spinoff of the Alt-A kind.) Heffernan says those loans were mispriced. Though origination rates for the A-plus-plus loans were intended to be below those of conforming (or what some people call "prime") loans, the rates were too darn low. Some employees and a wack algorithm were responsible for the pricing error. The employees were fired not furloughed and the algorithm corrected. Alas, too late. The A-plus-plus loans broke the bank. Or more accurately, warehouse lenders broke MLN's back when they began marking down all MLN loans - not just the A-plus-plus ones.

A dramatic deterioration indeed. In two short months a low ball pricing error re MLN's A-plus-plus loans made warehouse lenders undercut all MLN loans including the subprime ones. It's as if the prime and the tainted had melted, in the wink-wink of an eye, into one indistinguishable mass.

Carola Von Hoffmannstahl-Solomonoff

Sources include but are not limited to:

"Lean times for mortgage lenders foreseen in 2007," Matt Carter, Inman News, 01/10/07

"State Banking Officials Probe Mortgage Lender," Stephen Singer, AP/The Day, 01/04/07

"Sub-Prime Lender Cutting Back," Kenneth R. Gosselin, Hartford Courant, 01/03/07

"Mortgage Lenders Network Halts Loans as Housing Slows," Bradley Keoun, Bloomberg.com, 01/02/07

"Making Mortgages Like Widgets," Business New Haven, 10/31/05

"Shrinking Ameriquest Loan Empire may be sold," E. Scott Reckard, Los Angeles Times, 12/06/06

"Deal or No Deal: Officials try to keep companies in state," Cara Baruzzi, New Haven Register, 12/03/06

"Mortgage Lenders Network USA Announces Expansion Plans in  Phoenix," www.wlnusa.com 09/28/06

"Mortgage Lenders Network is Planting Roots, Growing Jobs in Connecticut," Department of Economic and Community Development, 05/08/06

"Ameriquest to Pay $325 Million And Reform Lending Practices," Office of the New York State Attorney General, 01/23/06

"Governor Rell Announces $4 Million Loan to Mortgage Lenders USA Inc.," 01/19/06, Department of Economic and Community Development

"All the President's Men, Meet the biggest predatory lender in Cleveland-- America's new ambassador to the Netherlands," Denise Grollmus, Cleveland Scene, 10/19/05

*Folks with flypaper memories will recall that the DECD was the force behind the eminent domain land grab of the Fort Trumbull neighborhood in New London, Connecticut, which led to the 2005 U.S. Supreme Court decision in Kelo v. New London. And that the DECD was at the center of the corruption scandals which in 2004, swept X Governor John Rowland out of office and into prison. Several of his cronies, including a former DECD head, followed him down.

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