Subprime layoffs head for record

NEW YORK (CNNMoney.com) -- If the banking industry, with its load of worries caused by the subprime meltdown, has another month like it did in August, it will be in record territory for job losses.

Last month, banks with ties to the subprime mortgage industry laid off more than 26,000 employees, the most of any month since global outplacement consultancy Challenger, Gray & Christmas began keeping such records in 1993.

Overall, that brought the total layoff damage to 107,758 in the financial industry this year. Another month that even remotely resembles recent trends will send the layoff total soaring past the 116,515 mark set during the recession of 2001.

And that could spread to other sectors too. "We'll now start to see how it impacts as the effects ripple into the other areas," said Challenger, Gray & Christmas CEO John Challenger.

The market for subprime mortgages began to crumble last year as rates for adjustable-rate mortgages issued two years prior began to reset to higher fixed rates and borrowers started defaulting in droves.

Banks have been laying off employees in large numbers since the beginning of the year. The two sharpest peaks came in August and in April, when 33,789 workers, most connected to the subprime industry, lost their jobs. The lowest month for layoffs was July, with 2,180.

Layoffs have come from lenders large and small.

Countrywide Financial (Charts, Fortune 500), the largest subprime lender in the United States, has announced plans to shed 20 percent of its workforce, or 12,000 employees. Lehman Brothers Holdings (Charts, Fortune 500) has slashed more than 2,000 jobs from its mortgage lending unit, and Bear Stearns (Charts, Fortune 500) has cut 240 positions.

Mortgage company NovaStar, meanwhile, dropped 37 percent, or 500, of its employees; Delta Financial Corp. (Charts) cut 300 jobs, and scandal-plagued Ameriquest Mortgage, once one of the nation's leading subprime lenders, shuttered its retail lending unit and laid off more than 2,000 workers.

The damage has been widespread. Some 156 institutions have filed for bankruptcy since the subprime collapse began, and Challenger said more will be on the way.

Among those filing bankruptcy were New Century Financial Corp., Quality Home Loans, Aegis Funding, HomeBanc Mortgage Corp. and People's Choice Financial Corp.

"That number is likely to grow," Challenger said. "I think that's the big question that will play out over the next six months: What are the repercussions from this hit to subprime on the economy? What other sectors will it infect? Housing and finance are the two areas that seem most likely to be in the direct path of the storm."

Among the non-lending sectors likely to be hit in the fallout are building trades, title companies and other areas involved in real estate transactions, as well as private equity firms that leveraged investments in real estate and now find themselves stuck with properties that either are underperforming or cannot be sold due to tighter lending restrictions.

So far, mortgage brokers, who market the loans that banks underwrite, say they've been spared mass layoffs, but several noted that many associates in other sectors of the industry have suffered.

Scott Stern, CEO of LendersOne Mortgage Cooperative, said he believes the worst may be yet to come, but that the industry will survive and return to profitability. LendersOne is an alliance of 100 mortgage bankers across the country who handle more than $40 billion worth of loans.

"Our member companies have bucked the trend, but no doubt the devastation on the employment side has been significant," Stern said. "This is absolute devastation to the industry, but it's a return to a different era of the mortgage industry and I think what we'll see is that things will get back to basics."

In fact, Stern said, getting some of the people out of the industry who came in during the boom years won't be a bad thing. There simply are more people now than there is business, and once that equation evens out things will get better, he said.

"The mortgage industry grew and grew because we created buyers who traditionally wouldn't have qualified," Stern said. "All those people that are leaving the industry, it's probably necessary because now there will be an equivalent number of industry people compared to transactions. There will be a lot less transactions, a lot less people, but a better market."