Mortgage mess is big, murky

No one oversees entire industry, so counting the number of shaky lenders is hard

WASHINGTON -- It's hard to know how scared to be if you don't know the size of the threat. No, not terrorism, housing.

The U.S. mortgage-lending business is a sprawling, varied enterprise that no one regulator oversees, making it impossible to know how many mortgages or lenders not insured by the government are in trouble.

Even worse, no public records are available to show who holds the trillions of dollars worth of mortgages that investment banks pooled and sold as securities to investors around the globe. The value of many of those securities plunge as mortgage defaults soar.

"You can't get your arms around the size of the problem. ... I don't think that anybody knows that number," said David Jones, president of Denver consulting firm DMJ Advisors and a former Federal Reserve economist.

About 90,000 nonbank mortgage lenders dotted the landscape last fall, when state regulators conducted their first formal survey. Dozens of bankruptcies and closings in recent months have likely whittled that number, and 25,000 workers lost jobs in August, aggravating worries about the downturn's effect on the economy.

Large numbers of the nonbank companies were based in California (about 4,100) and Florida (12,900), states where the real estate boom was especially heated. Now, on the downswing, the states are among those posting the highest numbers of foreclosures.

States license about 90,000 nonbank companies, which include brokerages that lend on behalf of other mortgage companies. Relatively few nonbank lenders -- including Countrywide Financial, the nation's largest mortgage lender -- are publicly traded and required to disclose financials regularly.

For a number of reasons, including a lack of resources, federal regulators don't scrutinize the activities of nonbank lenders the way they do insured institutions such as commercial banks or savings and loans. That means state regulators generally don't release detailed reports about the lenders' financials.

Scope of the crisis

Other indications of how widespread the mortgage lending universe is and how difficult it is for regulators to track include:

* In addition to 90,000 licensed nonbank firms, there are about 63,000 U.S. branches, according to a 2006 survey by the Conference of State Bank Supervisors.

* The survey counted 280,000 loan officers at these companies, although 14 states and the District of Columbia don't license loan officers, so the total number was much higher. The states are Alabama, Arizona, Delaware, Georgia, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, North Dakota, Pennsylvania, Virginia and Wyoming, and some of them are moving toward requiring officer licensing.

Experts say it's possible to make forecasts about the length and depth of the housing market slump by tracking changes in interest rates, home sales, foreclosures and other indicators. Not having specifics on how many mortgages or nonbank lenders are being squeezed has potentially damaging ramifications for investors and policymakers.

In the past five years, state-licensed lenders made 70 percent of the mortgages issued annually, $2.8 trillion in 2006. Of 8,615 institutions backed by the federal deposit insurance fund, about 800 had 50 percent or more of assets in mortgages or mortgage-backed securities.

Industry behemoths, such as CountryWide and IndyMac Bancorp., were shoved into the spotlight when Wall Street began to home in on the fallout of too many mortgages made to borrowers with subprime or weaker credit.

There are a host of smaller companies, some specializing in high-risk subprime mortgages, that investors are paying attention to as default and foreclosure rates soar.

As home sales soared in the past two decades, thousands of mortgages were bundled and sold to institutional investors. The practice spread credit risk among millions of investors, making homeownership more affordable. But now, no one knows who holds the loans that might be at risk of default and who is liable if they do.

State regulators are doing what they can, says Bill Matthews, senior vice president of the Conference of State Bank Supervisors.. The survey taken in fall of 2006 was intended to help create a national registry of state-licensed mortgage companies and loan officers.

When it begins in January, searches will reveal the record of a company or individual, including enforcement actions against them in different states. Though some lenders are harder hit than others, experts say, banks and other firms that stuck with conventional, fixed-rate mortgages could fare relatively well in coming months.

"They do have the credit-crunch problem. They're as nervous as everybody else" about being able to make loans, said Howard Glaser, an industry consultant who was a senior housing official in the Clinton administration. "But they don't have the losses."