Last few days the market is full of news about how the number of foreclosures are increasing around U.S. and how badly subprime lenders are screwed. I do not want to reiterate the same point again and again. Instead i will list a few interesting pointers/takeaways from this whole episode. But just before doing that for those who do not know what subprime is…
What is a subprime loan ?
This is a loan to someone with a bad credit history. These people pay higher interest rates, earning more money for lenders, so long as the mortgage payments keep coming.
Delinquencies & Foreclosures
- The delinquency rate for one-to-four-family houses rose to 4.95% of all loans outstanding compared with 4.67% during the 3rd quarter. The North Central region had an overall delinquency rate of 5.68%, the South 5.71%, the Northeast 4.59% and the West 3.18%.
- A record high number of homeowners faced a serious threat of foreclosure during the 4th quarter of 2006. Foreclosures were highest in the North Central region, at 2.02%. The rate in the Northeast was 1.16%, the South was 1.08% and the West just 0.63%.
7.78% of nearly 6 million subprime loans were seriously delinquent, since many borrowers have difficulty making payments when home price appreciation fades and interest rates on their adjustable-rate loans jump up from their original low teaser rates.
- At least 20 lenders in the subprime mortgage sector have gone out of business.
- Total subprime mortgages outstanding amount is about $1.3 trillion, of which $700 billion are held by private asset-backed securities issuers.
Stock Market Saga
- Homebuilders like D.R. Horton (DHI), Toll Brothers (TOL) and Pulte Homes (PHM) have cut the number of new homes built, but a large supply of existing homes is also forcing them to reduce prices or offer incentives. DHI, TOL & PHM stocks lost -14.4%, -12.2% & -20.1% respectively in the last 3-months.
- Countrywide Financial Corp (CFC) the largest U.S. mortgage lender, told its brokers to stop offering borrowers the option of a no-money-down home loan. CFC stocks sank -16% in the last 3-months.
- No. 2 subprime lender New Century Financial (NEW) warned that it faces $8.4 billion in loan repayment obligations. Its shares had already been badly battered over the last month on rising concerns of a possible bankruptcy filing. 1-year return was -95.81%.
- Other subprime lenders like Accredited Home Lenders Holding Co. (LEND) and Fremont General Corp. (FMT) are facing a major meltdown at the stock market too. FMT, have cited mortgage fraud, along with the softer housing market and loose underwriting standards, as contributing to a rapid run-up in delinquencies. FMT said it would exit the subprime business amid regulatory pressure, and severed relationships with 8,000 brokers.
Few More Facts
- The FBI is seeking to stem a rising tide of crime in home financing. They warned borrowers and lenders that mortgage fraud can result in stiff fines and prison time.
- Late payments for residential mortgages shot up by 15.6% in the fourth quarter.
- National inventory is 20% higher than last year, vacancy rates have soared and prices are down about 3%. With tighter credit, prices might fall another 5-7 %.
- Even though the housing market has slowed down, the U.S. economy and job market has held solid.
- Housing meltdown is bad news for investors in U.S. residential mortgage-backed securities.
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So who is at fault. The lenders or the borrowers ?
Taking a loan is a give and take relation. The lenders were stupid/greedy to loan out an amount they knew borrowers could not afford. Lenders had all the information (W2, credit score, paystubs) they needed to make the right decision. The borrowers were stupid/naive to not understand their own financial strength. Borrowers made decisions without weighing all the possibilities and got burned out. Both are at fault.
Conclusion: Subprime lenders are already slaughtered, but what remains to see is how will rising mortgage delinquencies affect home prices overall ?
(Source: CNN Money)