Accredited Home Lenders Holding Co. became the latest banker caught in the turbulence of a shaky subprime mortgage industry that is rattling financial markets around the globe.
The San Diego-based company said Wednesday it will have to shut down most of its business to survive. It plans to slash its work force of 2,600 to just 1,000 people and close 65 branches.
Accredited said it will immediately stop accepting applications for home loans in the U.S., though it will honor the those it has already committed to finance, saying that shutting down most of its business was necessary to navigate the turbulence in the mortgage industry.
The company issued $15.77 billion in home loans last year.
It will close its retail business, which issues home loans directly to consumers, and scale back much of its wholesale lending division, which issues mortgages through brokers.
More Bankruptcy Protection Filings
Accredited's troubles followed the apparent demise of several other lenders, including First Magnus Financial Corp., which filed late Tuesday for bankruptcy protection — less than a week after suspending its operations.
First Magnus, based in Tucson, Arizona, had total assets estimated at more than $942 million and liabilities of nearly $813 million, according to the bankruptcy filing.
"After carefully considering our options, a Chapter 11 filing provides First Magnus with the ability to realize the highest value of our assets for our creditors," First Magnus President and CEO G.S. Jaggi said in a news release.
It stopped taking mortgage loan applications and fired 99 percent of its 6,000 employees on Thursday.
The company originated home loans and then sold bundled loans into the secondary loan market. Among its debts, it owes $5 million to the National Bank of Arizona and $2.8 million to WNS North America, a business process outsourcing firm headquartered in Mumbai, India.
First Magnus also still owes employees about $13 million from the last pay period, spokesman Gary Baraff said. It made that amount its No. 1 request in the bankruptcy filing.
"Nobody in the company has been paid, including the CEO," according to Baraff.
He said everyone at First Magnus is still reeling from the shock of the company's downfall. "The company went out of business overnight," Baraff said. "Three weeks ago we were at the apex of the company's history. Everything was falling into place for us, and we had remarkable momentum across the country. It was shocking to everyone that essentially the secondary market collapsed."
Just last week the leading lender Countrywide Mortgage said it had borrowed $11.5 billion from a group of 40 banks to fund loans, a move that shows just how deep the lending crisis has become.
Stung by decaying credit quality, mortgage lenders across the industry have struggled to raise cash. Subprime loans are made to borrowers with shaky credit histories or those who cannot always document their incomes.
In a bid to calm jittery financial markets, Treasury Secretary Henry Paulson on Tuesday said the U.S. will safely get through the crisis that has sent world financial markets reeling.
"We are going to work through this problem just fine," Paulson said. He urged patience as investors reassess their appetite for risk, saying there isn't a "quick solution" to the matter. "These things take a while to play out," the secretary said.
Paulson commented as the Federal Reserve, trying to further stabilize the markets, pumped another $3.75 billion into the financial system Tuesday. It was the latest in a series of cash injections that have topped more than $100 billion since last week.
In another development, Senate Banking Committee Chairman Christopher Dodd urged Federal Reserve Chairman Ben Bernanke to use "all the tools available" so that a spreading credit crisis doesn't undermine the national economy.
Dodd, a Connecticut Democrat, is seeking his party's presidential nomination.
Consumers Fight Back
Consumer advocates on Tuesday called for a moratorium on home foreclosures, warning that California is facing a tidal wave of foreclosures over the next year as more homeowners are hit with payment increases brought on by subprime loans and risky mortgages.
"The curve is really starting to go up," said Alan Fisher, executive director of the California Reinvestment Coalition, a collection of nonprofit organizations and public agencies that advocate for the poor and minorities.
"We're seeing just the beginning of a problem," he added, testifying before the Senate Banking, Finance and Insurance Committee.
The Mortgage Bankers Association estimates that more than 46,000 California homes were in foreclosure in March, and another 76,732 mortgage loans were seriously delinquent.
Witnesses warned the committee that the numbers would grow over the final months of this year and in 2008 as more homeowners face higher payments because of adjustable rate mortgages.
"California is clearly ground zero for this problem nationwide," said Paul Leonard, director of the California office of the Center for Responsible Lending, a nonprofit group that advocates for homeowners.
From NPR reports and The Associated Press