The U.S. housing and
lending markets are looking worse then originally forecast according to a
new report issued by Standard and Poor’s Equity Research. They report the
latest concern is due to the continuing decline in the subprime mortgage
loan market, whose customer base is primarily composed of borrowers whose
credit history is less than creditworthy.
Global banking giant
HSBC Holdings, the third largest subprime lender in the United States,
disclosed on February 7 that full-year 2006 impairment charges at its U.S.
mortgage subsidiary would be 20% higher than the $8.8 billon that analysts
had predicted. Following that announcement, on February 8, New Century
Financial, the second largest subprime lender in the U.S., said it not only
expected to report a loss for the fourth quarter but would also restate its
financial results for the first three quarters of 2006 as well. Another
subprime lender, ResMAE, filed for bankruptcy on February 13 (see the
bankruptcy filings section). Since December there have been 21 failures
reported in the subprime lending market.
According to the
Mortgage Bankers Association, subprime mortgages accounted for 19% of all
mortgage originations in the first six months of 2006. Many of these loans
were generated to assist buyers with their down payments. The first mortgages adjustable rate interest
(ARMs) rates are
now being addressed with increases and borrowers no longer have all the
refinancing options previously available to them. The reduction in
refinancing options is due not only to a slowdown in the growth of home
prices but limited appreciation in home equity, if any at all.
In addition to the
subprime lenders, some of the nation’s largest banks and home builders are
also affected. Citigroup, JPMorgan and Wells Fargo all reported increases in
overall mortgage losses in the fourth quarter of 2006. Centex and KB Home,
two of the largest national home builders, wrote off collectively $929
million for land and land options according to their quarterly reports
released in January. Banks have started withdrawing credit lines to firms
such as Ownit Mortgage and Sebring Capital Partners, two of the twenty-one
reported failures. In their bankruptcy filings they both reported the loss
of their bank credit lines as the primary cause of their demise.
While mortgage industry
creditors reported average increases of 10% annually between 2000 and 2005,
banks and other credit institutions became more exposed to mortgage debt
that increased at an annual growth rate of 11% during the same period while
savings institutions only experienced a 7% increase.
foreclosures are expected to get worse. One out of five subprime mortgages
written during the past two years is forecast to end in foreclosure,
according to The Center for Responsible Lending, a Durham, North Carolina
research group. They report that even when home prices were increasing,
subprime home loans did poorly, with as many as one in eight, or 13%, of the
loans ending in foreclosure within five years of origination.
is possible that we may experience another period reminiscent of 2000 –
2002 when investors were unwilling to purchase securities backed by subprime
mortgage loans and large companies such as ContiFinancial and Conseco were
forced into bankruptcy.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or