Saxon Finance: A Retrospective on a Subprime Lender

Saxon Finance, once a prominent player in the United States mortgage market, is now largely remembered as a key contributor to the 2008 financial crisis. Specializing in “Alt-A” mortgages, a category of loans considered riskier than prime but less risky than subprime, Saxon’s aggressive lending practices ultimately proved unsustainable and contributed to the collapse of the housing market.

Founded in 1986 as Meritech Mortgage Services, the company rebranded as Saxon Capital, Inc. and later as Saxon Finance. Saxon quickly gained a foothold in the burgeoning market for non-prime mortgages. Their business model centered on originating and securitizing mortgages, bundling them into mortgage-backed securities (MBS) and selling them to investors. This process, while potentially profitable, carried significant risk if the loans underlying the securities defaulted at high rates.

Saxon’s Alt-A loans often featured characteristics that made them vulnerable. These included low or no documentation requirements, allowing borrowers to qualify with minimal proof of income or assets. Many also had introductory “teaser” rates that subsequently adjusted upwards, leading to significantly higher monthly payments. This affordability crunch put borrowers at risk of default, particularly as the housing market cooled.

The company’s success was largely fueled by the prevailing market conditions of the early to mid-2000s. Low interest rates, rising home prices, and a general optimism about the housing market created a strong demand for mortgage-backed securities. Saxon capitalized on this demand, originating a large volume of loans, often without sufficient scrutiny of borrowers’ ability to repay.

As the housing bubble began to deflate in 2006 and 2007, the cracks in Saxon’s business model became apparent. Foreclosure rates on Alt-A mortgages surged, leading to significant losses for investors holding Saxon-backed securities. The value of these securities plummeted, triggering a wider crisis in the financial markets. Saxon itself faced increasing financial pressure as its access to funding dried up.

In 2007, Saxon Finance was acquired by Cerberus Capital Management, a private equity firm. The move was intended to stabilize the company, but ultimately proved insufficient to stem the tide of losses. Under Cerberus’ ownership, Saxon continued to struggle with rising defaults and mounting legal challenges.

The legacy of Saxon Finance serves as a cautionary tale about the dangers of unchecked lending practices and the risks associated with complex financial instruments. The company’s role in the subprime mortgage crisis highlighted the importance of responsible lending, adequate risk management, and robust regulatory oversight in the financial industry. The collapse of Saxon Finance contributed significantly to the broader economic downturn, underscoring the far-reaching consequences of unsustainable lending practices in the housing market.