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.

Delinquencies and 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.

It 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 Bankruptcy.