Ameriquest Parent Sees Steep Drop in Earnings

Profit at Ameriquest Mortgage Co. and its affiliates plunged 81% last year, reflecting a brutal price war over loans to higher-risk borrowers, rising interest rates and the company’s agreement to pay $325 million to 49 states to settle allegations of predatory lending.

Orange-based ACC Capital Holdings Corp., the privately held parent of Ameriquest and its sister lenders, earned $257 million in 2005, down from $1.34 billion in 2004, according to copies of its annual financial statements obtained by The Times. Revenue fell from $4.13 billion to $3.67 billion.

The numbers shed light on Ameriquest’s recent decisions to close its national network of 229 retail branches and eliminate more than 5,000 jobs to operate more efficiently. In addition to these moves, the company says that this year it has scaled back its aggressive price cutting on loans.

The steep discounts, part of an industry battle for market share at a time of rising interest rates and slowing housing markets, drew an unusual rebuke last February from Countrywide Financial Corp. Chief Executive Angelo Mozilo, who accused rivals Ameriquest and New Century Financial Corp. of Irvine of being “irresponsible” spoilers of the industry’s profitability.

ACC Capital caters to the “subprime” market of borrowers with spotty credit or other issues that stop them from getting lower-cost “prime” loans. It was the largest subprime lender in 2004 and 2005, but fell to No. 6 in the first quarter of this year, according to a mortgage industry publication.

If anything, Ameriquest’s market share is likely to erode even more, said Robert P. Napoli, who analyzes the mortgage business for investment advisor Piper Jaffray Cos. Napoli attributed Ameriquest’s loss of market share to its decision to shutter its retail branch network, as well as operational changes it is making as part of its settlement with 49 states and the District of Columbia.

“They’ll be lucky if their volumes don’t fall by 90% on the retail side,” Napoli said. “Maybe they can eventually come back, but I think they’ll become a minor player for a while.”

Because Ameriquest is not publicly traded, it does not file financial statements with federal regulators for review by investors. Ameriquest executives confirmed that the documents obtained by The Times were the private company’s audited financial statements.

Spokesman Chris Orlando said the company, like the entire mortgage industry, had been affected by rising interest rates and a slowing housing market, but remained profitable by streamlining operations and expanding its loan offerings.

In a series of articles last year, The Times detailed allegations from current and former employees that management pressure to boost loan volume created a “boiler room” atmosphere in which Ameriquest workers forged documents, misled borrowers about rates and fees and inflated customer incomes and home values to qualify them for loans they could ill afford.

The allegations against the company held up confirmation of Ameriquest founder and owner Roland E. Arnall as U.S. ambassador to the Netherlands. Arnall finally was confirmed after his company settled with state authorities.

According to the financial statements, the Ameriquest companies also have been hurt by rising short-term interest rates, a problem shared by other lenders. ACC Capital uses credit lines from Wall Street banks to fund its loans before selling them, usually as mortgage-backed securities.

The average cost of those short-term funds rose from 1.96% in 2003 to 2.82% in 2004 and 3.85% last year, ending the year at 5.05%, the financials show. ACC Capital paid $718.5 million in interest on its borrowings last year, up from $528 million in 2004.

By contrast, the company’s interest income earned on loans fell from $1.79 billion in 2004 to $1.24 billion last year.

In addition to Ameriquest Mortgage, ACC also includes a larger affiliate, Argent Mortgage Co., which provides subprime loans through independent mortgage brokers rather than its own in-house sales force. Other affiliates are Town & Country Credit Corp., a small retail lender; Long Beach Acceptance Corp., a subprime auto lender; and AMC Mortgage Servicing Inc., a specialist in billing and collecting loans.

Ameriquest and Town & Country reported a combined net income of $202 million last year, down from $1 billion in 2004. The 2005 results included the $325-million charge for the settlement with the states, which were investigating the retail operation and didn’t focus on the side that works through brokers.

That wholesale side of the business lost $41 million last year, compared with a $340-million profit in 2004.

Orlando said Argent’s “core results were profitable” and attributed the loss to fluctuations in how and when income was recognized.

Piper Jaffray analyst Napoli said the large decline in Argent’s results reflected the severity of the price war between it and other subprime lenders.

“It seems like they were trying to pressure the market in hopes they would force other lenders out of business with this aggressive pricing,” he said.

“But we’ve been following the mortgage industry for a long time, and that strategy generally doesn’t work,” Napoli said. “A company like Countrywide can lay back and just wait for [other lenders] to hit the wall, which is what looks like has happened here.”

Napoli covers several of ACC Capital’s competitors, including New Century, whose shares he downgraded in the last year from outperform to market perform. Piper Jaffray has provided investment-banking services for competitors of ACC Capital and is a market maker in their shares.

ACC’s spending on marketing and advertising, which includes sponsorships of Major League Baseball and a tour by the Rolling Stones, rose from $365.3 million in 2004 to $419.3 million last year. By comparison, No. 1 mortgage lender Countrywide reported advertising and promotion expenses of $229.2 million last year, up from $171.6 million in 2004.

The subprime mortgage industry overall expanded from $530 billion in 2004 to $665 billion last year, according to the industry publication Inside B & C Lending.

But some observers saw in Ameriquest’s earnings a reflection of hard times ahead for the entire industry.

“We are expecting some subprime lenders to go out of business this year,” said Christine Clifford, vice president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Md.

“The combination of a shrinking market, rising costs and lots of lawsuits is extraordinarily difficult to manage,” she added.

One competitor, Aames Investment Corp. of Los Angeles, agreed recently to be acquired by Accredited Home Lenders Inc. of San Diego after losing $6 million last year.