The mortgage shakeout

The shakeout

The mortgage headlines have been rolling in over the past few weeks. Not just headlines about the crisis/meltdown/chaos, but also the headlines about exiting the mortgage business and cutting mortgage jobs.

Companies that previously diversified into mortgages are significantly scaling back or completely closing their mortgage units.

Mortgage companies that fueled growth by expanding the pool of eligible customers through loosening standards or embracing higher risk programs are reeling in standards and eliminating programs.

Some mortgage companies have just gone bankrupt or thew in the towel.

Where it's going

People are waking up to the fact that the easy money generated by mortgage business has repercussions and risks in the light of day.

After the shakeout, there will be fewer firms chasing fewer loans of higher quality.

What's next

Companies who decided to diversify into mortgages or expand mortgage operations during the boom will have an earnings hang over. As long as the mortgage operations were ancillary to other profitable financial operations, the companies will simply take the write downs, exit and restructuring charges, and move on.

Most established companies who expanded wildly through the boom will sober up. They continue to re-evaluate and adjust lending programs, right size their organizations, rediscover conservatism, and try to once again find the correct pace of moderate predictable growth.

A few more newer mortgage companies and perhaps one or two established companies will disappear. Bad loans will come home to roost, companies who grew up during the boom won't find a way to adjust and remain profitable during the lean times, investors will flee, and lawsuits will follow.

Years from now

Some mostly unknown company will emerge and redefine the mortgage business. This company will have learned the lessons from the past and start to act boldly and confidently in a space that others have left for dead. Investors will be suspicious. High quality earnings and rational growth will ensue. Early investors will start to pay attention and start putting new money in an old place again.