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Is Wall Street Delirious with Subprime Fever?(Merrill Lynch and Company Inc purchases First Franklin Financial Corp)
By now it's old news that Merrill Lynch is coughing up $1.3 billion for subprime giant First Franklin Financial Corp. and two affiliates. In total, about five Street firms were vying for FFFC with Goldman and Deutsche considered to be the runner-ups in the bidding war.
And by now it's no secret that Wall Street loves not only the business of lending money to subprime lenders and securitizing their production, but now they apparently love the business of making home mortgages to credit-impaired consumers. Love, love, love.
And to this I have to say the following: Hey, Wall Street, have you lost your collective mind? I'm not just talking to Merrill Lynch. I'm talking to Morgan Stanley, which is buying Saxon Capital, to Deutsche, which is buying Chapel Funding, and to the buyer of Impac Holdings, which likely will be an investment banking firm as well, that is, if Impac actually decides to sell.
Yes, it's a wild and crazy time in mortgage land. Production volumes are beginning to creep down and could truly turn ugly in the fourth quarter. Home prices are headed south and show no signs of improving anytime soon. In a recent interview, Countrywide CEO Angelo Mozilo, an industry sage for sure, repeated his belief that mortgage banking, and housing in general, are headed for a hard landing.
So, why then are firms like Merrill and Morgan paying good money for subprime lender/servicers? As one former managing director told me: "I guess Wall Street is smarter than me."
But who knows, maybe the Street knows what it's doing. I have a general perception about Wall Street and it goes like this: As soon as a crack appears in the facade, they head for the exit. Will the Street bolt the mortgage lending industry when the "downturn" comes?
Based on the Merrill and Morgan deals, the answer to that question is no. The downturn has already begun and it would appear that the Street might actually be doubling down on its bet in mortgageland, that is, nonconforming mortgageland.
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