The changing Philadelphia mortgage industry: Mortgage Firm Restructuring

An exact reversal of action, or restructuring, is taking place in this post-boom Philadelphia and national housing market. Large Philadelphia companies began acquiring many mortgage lenders and increasing employees when times had been good. And why not? Times were good and the mortgage industry was bringing in large cash flows. But times have changed. What began as employee expansion and a bright future for mortgage companies 2-3 years ago has now reversed. Firms are now selling off (if possible) or closing subprime divisions and laying off employees. In an article entitled “Wall St. losing subprime lenders” in the Philadelphia Inquirer, 1,200 people lost their jobs in light of Lehman Brothers Holdings, Inc. closing its subprime unit, BNC Mortgage L.L.C. This is just one example of corporations attempting to separate themselves from the subprime market. On Wall Street, any separation from the risk of subprime has led to an increase in company valuation. The list of companies who made moves to acquire mortgage firms in the past years includes Merrill Lynch, Bear Sterns, Morgan Stanley, Credit Suisse, Barclays, and Deutsche Bank. Now each company is struggling to separate itself from subprime and cut their loses.

The post-boom housing market has also begun to slash the number of M&As, mergers-and-acquisitions, which had been booming since 2003. In a September 6^th Wall Street Journal article, Robert Kindler, vice chairman of Morgan Stanley, states that he “would not be surprised if deal volume is down 20% to 30% next year.” This is an abruptly different change in momentum as M&As had been $579 billion in July and now only $222 in August, and are expected to continue this decline into next year. Where did this slip in the M&As market originate from? It all stems from the mortgage meltdown and the high cost of money. With companies struggling to finance M&As and large banks focusing on staying liquid, money is being sopped up in different aspects of the economy and not permitting easy M&As. Not to say that there won’t be any, but the volume will be greatly reduced.

In light of these effects from the ‘liquidation crisis,’ credit is expected to remain tight going into next year. News from the Fed is still greatly anticipated come September 18^th as to where rates are heading. (I would expect a 25 basis point rate cut in hopes to ease the credit problems) Now the markets are really seeing a reversal of character as once M&A booms are now being reversed with cutbacks, layoffs, and an effort to disassociate with subprime mortgages. Now leading to a consolidated Philadelphia mortgage marketplace, with only those truly knowledgeable left in the industry.

By, Joe Brady

Comments

[Brian Brady]

How do you think the markets would react to a more dramatc, say, 50 bp cut next week?