Subprime lending / Rising damp "economist"

after the subprime implosion is now a fact the next shoe to drop is "alt a"

nachdem die subprimeimplosion nun fakt ist geht der fokus jetzt auf "alt a"

Will turbulence in America's subprime mortgage market spread?
LAST November the American publisher of those bright-yellow books that claim to help “dummies” master everything from trigonometry to anger management released “Flipping Houses for Dummies”. It promised to teach would-be property moguls how to “lay the foundation for successful flipping and bring home the bucks”. Four months later, it is the seemingly indomitable housing market that has flipped. One of its main engines of growth, the subprime-mortgage industry, is in free-fall. Where it lands is anyone's guess.

Subprime-mortgage lenders offer higher rates of interest to borrowers who have blemished credit histories. Almost three dozen of the lenders have gone bust or been sold in recent months, as loans have soured. Late payments swelled to around 12.6% last autumn, ....

On the same day New Century, another battered lender, said it faced a probe into alleged insider trading. It may not be around long enough to defend itself. The firm, which expects to have lost money in 2006, has breached its contracts with many of the banks that lend it cash for day-to-day operations. The share prices of New Century and its beleaguered subprime brethren plunged on March 5th,

Big lenders, too, have been burnt. General Motors, the world's biggest carmaker, may have to take a charge of almost $1 billion to cover the bad mortgage loans of its subsidiary, Residential Capital, says Lehman Brothers. HSBC, Europe's biggest bank, saw its bad-debt costs soar by 36% to over $10 billion in 2006 because of sloppy lending.

Its chief executive, trying to reassure investors, said: “

This is not trailer-park lending...this is Main Street
America.”

Yet that is precisely the problem. Subprime mortgage loans made up over a fifth of all originations last year, according to Inside Mortgage Finance, a newsletter, up from 6% in 2002 (see chart). Lenders, intent on keeping fees flowing as the housing market began to cool in 2004, pulled an ever wider swathe of Main Street America into the housing market. They lowered underwriting standards and offered a bevy of “affordability” products like extra-long-term or “interest-only” mortgages (in which principal payments are deferred for a time) and loans with low teaser interest rates, known as hybrid mortgages, that balloon after a few years. Indeed, most subprime mortgages written in the past three years were “risk-layered”, using a combination of various inducements to make a mortgage more attractive to borrowers but also much riskier.

The “FICO” credit scores on which mortgage lending often relies did not capture this risk layering. Scores were probably inflated. David Hendler of CreditSights, a research firm, says around 40% of a FICO score is based on repayment history—but these records were “artificially rosy” because of the recent housing boom.

Now rockier times lie ahead. Three-quarters of the subprime loans written in 2004 and 2005 were hybrid ones that will see interest rates jump starting this year. Many were underwritten assuming borrowers would refinance into new, cheaper mortgages before this happened. But interest rates are higher than they were and lending standards have tightened, making it harder for borrowers to qualify for new loans. Many borrowers have so much debt—$191,090 on average last year according to Standard & Poor's—that they have little equity in their homes to borrow more against. Sagging house prices mean that selling homes to cover mounting debts may not be an option, either.

This could lead to credit losses and foreclosures. Credit Suisse thinks “marginal” borrowers make up a third of subprime loans. But banks and holders of securities backed by these mortgages could get hit too. Spreads on subprime-mortgage-backed securities have widened sharply. Demand has dropped. New issues rated by S&P fell 29% in the fourth quarter of last year over the same period in 2005.

Others are scrutinising “Alt A” mortgages, underwritten with little or no documentation of, say, a borrower's income. Arrears have risen sharply, too, although they are nowhere near as high as in subprime. Around $400 billion of such loans were written last year, which is 13% of the total market and the fastest-growing chunk of it. Fitch, a ratings agency, reckons that mortgage loans underwritten with less-than-complete documentation standards made up over half the subprime loans.

The effects of a dramatic slowdown, or credit crunch, in the subprime and the Alt A market could spread. The stock of unsold homes would remain unsold longer, crimping house prices. Consumer spending might slow. Investors might shy away from securities backed by prime mortgages and other assets, not just subprime ones, pulling liquidity out of the market.

the should have written a book with this title .... :-)

die hätten im letzten jahr lieber ein buch mit diesem titel schreiben sollen..... :-)