Signs that subprime mortgage market has borrowed trouble
http://www.latimes.com/business/la-re-harney18feb18,1,1828076.story?coll=la-headlines-business
NATION'S HOUSING
Signs that subprime mortgage market has borrowed trouble
By Kenneth R. Harney, Washington Post Writers Group
February 18, 2007
WASHINGTON — Is a blowout taking shape in the impaired-credit mortgage market? Could lax underwriting standards during the boom years — no verification of applicants' incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy debts — finally be coming home to roost?
The omens are unmistakable:
Delinquencies — failure to make a mortgage payment when due — in the $1.3-trillion impaired-credit mortgage market hit 12.6% in the latest quarter, up from 11.7%. Delinquencies exceeded 13% among borrowers with so-called subprime adjustable-rate loans.
Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection. HSBC Holdings PLC, Europe's largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses.
New Century Financial Corp., a California-based subprime lender, saw its stock plunge 36% in a single day when it announced that "buybacks" of delinquent loans had been more numerous and more costly than anticipated. Subprime lenders are required by Wall Street bond investors to repurchase loans that go into serious default early, suggesting poor underwriting, bad appraisals or other issues.
Ownit Mortgage Solutions, another California subprime mortgage lender, abruptly went out of business when buyback demands reached a reported $100 million. Ownit's chief executive, William D. Dallas, acknowledged problems in underwriting, but also blamed bond investors' demands for high-yielding no-income verification loans.
Angelo R. Mozilo, chief executive of Countrywide Financial, was quoted as saying "there's probably 40 or 50 [subprime loan originators] a day throughout the country going down in one form or another. And I expect that to continue throughout the year."
What's going on here? At a recent Senate hearing, a leading consumer-protection advocate, Martin Eakes, chief executive of the Center for Responsible Lending, called the subprime market "a quiet but devastating disaster."
Eakes' group published a study last month that estimated that 2.2 million overextended subprime mortgage borrowers would lose their homes to foreclosure — a projection hotly disputed by the mortgage industry. Eakes told the Senate banking and housing committee that subprime lenders have "virtually guaranteed" high levels of delinquency and foreclosures by offering borrowers excessively risky loans with teaser rates and low payments for the initial two or three years that later explode into sharply higher payments.
Lenders also have allowed unqualified borrowers to merely state — not verify or document — their incomes, putting large numbers of them into loans they should never have been granted, Eakes said. He quoted industry research that found that 90% of stated-income mortgage applicants "had inflated incomes compared to IRS documents," and that 60% of them exaggerated incomes by 50% or more.
Representatives of the lending industry challenged Eakes' analysis of rising subprime defaults and told the Senate committee that the real reasons for homeowner defaults are unanticipated economic difficulties such as job loss.
Douglas G. Duncan, chief economist of the Mortgage Bankers Assn., challenged the idea that "delinquencies are at crisis levels," or that unusually high numbers of borrowers — subprime or otherwise — are losing their houses to foreclosure. In mid-2002, for instance, subprime delinquencies exceeded 14%, then fell to just above 10% in 2004 and 2005, and have risen since, he said.
Whichever perspective you prefer, this much you can be certain about: The entire subprime industry is likely to tighten underwriting standards and throttle back on the highest-risk loans. And buyers with marginal or poor credit are likely to be quoted even higher rates and fees than they would otherwise.
this is me adding to the conclusion of the article: and will eliminate 25% of potential homebuyers from the purchase market and the same number from the refinancing market and will adds a massive foreclosures to the market.
