Shakedown: America's subprime lenders

[Mr.Conley]

http://www.economist.com/daily/news/displaystory.cfm?story_id=8845261&top_story=1

Anxious investors had hoped that the worst was over in the suddenly skittish stockmarkets. No such luck. On Tuesday March 13th the three big American indices gave back nearly all the ground they had regained since bottoming on March 5th. The Dow, the NASDAQ and the S&P each fell by about 2%. On Wednesday markets in Asia and Europe followed them down. Lacklustre American retail spending figures in February added to the gloom. Some fear that a slowing housing market may finally mean a contraction in consumer spending. But in the main, the losses stemmed from more direct worries about the housing market.

The trouble started with New Century, which had become the nation’s second biggest lender to would-be homeowners with dodgy credit histories or little cash for a down payment. Such loans, known as “subprime” mortgages, typically carry interest rates at least 2-3% higher than conventional ones. This has been a booming business in America, but the slowdown in the housing market has pushed many such lenders into the red. Last month New Century said it would be restating its earnings, triggering investigations into how it has accounted for its bad loans.

Last week the company was forced to stop offering new loans because it could not obtain financing; its bankers say it has defaulted on payments. Lenders have not only cut off all credit lines, many also demanded accelerated repayment of outstanding loans—which New Century says it cannot make. If the rest of its lenders demand their money back New Century will be on the hook for roughly $8.4 billion. The New York Stock Exchange has suspended trading in the firm’s shares and has started proceedings to delist its stock, which last changed hands at $1.66 (down from a peak of $51.97 last May).

Others are in trouble too. Accredited Home Lenders, another subprime specialist, has seen its stock hammered. Like New Century, Accredited saw its profits destroyed by soaring default rates and falling demand for new loans. The firm is struggling to find new forms of finance: to a spooked Wall Street, its credit is no better than one of its deadbeat borrowers. The firm’s stock closed at $3.97 on Tuesday, after a plunge similar to New Century's. General Motors is shoring up its troubled, former, subprime lending unit to the tune of $1 billion.

The shakedown is hardly unexpected. When home prices soar, as they have in America for some years, subprime lending is a lucrative business. Borrowers who cannot make their mortgage payments can refinance at more attractive rates (since the appreciation in their home value makes the loan a better proposition for lenders). Or they can sell the house, pay off the bank, and pocket a little money. As America’s housing market rose, lenders began offering ever-more exotic loan forms to entice new entrants into the housing market: adjustable-rate loans with introductory “teaser” rates; interest only loans; even mortgages in which the minimum monthly payment was less than the accrued interest. Naturally, many of the borrowers attracted to these were people who could not afford a higher monthly payment. The Federal Reserve says that homeowners' financial obligations as a percentage of household income are now the highest they have been since the data were first collected

Now the introductory rates on these loans are resetting, and the deflating housing bubble is making it difficult to refinance. On Tuesday the Mortgage Bankers Association said that defaults are rising. All categories of loans are seeing some signs of growing financial distress among borrowers, but the trouble is concentrated in the subprime sector, especially for adjustable-rate subprime mortgages. The number of serious delinquencies, defined as loans that are 90 days overdue or in foreclosure, is also rising.

It is not only hapless borrowers and those in the subprime loan market who will suffer. Collateralised debt obligations (CDOs), which repackage various forms of debt and derivatives into securities with varying degrees of risk, may now be hit. CDO issuers divide the package of debt into tranches with varying degrees of risk. Many subprime loans have ended up as pieces of CDOs, and as default rates soar the damage may well spill over into the CDO market.

The ripples may spread further. Shares in Moody’s, the ratings agency, and McGraw-Hill, which owns rival agency Standard and Poor's, have both tumbled since February, as investors have grown less attracted by the business of rating securities based on subprime mortgages. Commercial mortgage backed securities (CMBS) have also been infected, although there is no obvious connection between overstretched residential borrowers and the markets for office and retail space. Treasury yields are falling as investors seek safer harbours.

What of the American economy? There could be a vicious cycle, as defaults and foreclosures dump houses on already saturated markets, forcing prices down further and leaving more overstretched homeowners with negative equity. Housing slowdowns drag down GDP growth in two ways: by slamming the brakes on the construction industry, and by making consumers feel poorer so they spend less. The confluence could shock the economy, especially when combined with contracting credit. Homeowners and investors will be braced for more bad news to come.

 

[red states rule]

The Lending Blame Game
Posted by Julia A. Seymour on March 14, 2007 - 16:47.
Last night, ABC "World News with Charles Gibson," and CBS "Evening News" both blamed increased foreclosures on lending companies and mentioned tightened regulation instead of discussing the issue of personal choice. NBC "Nightly News" was the only network to bring individual choice into the story on March 13.

"Mortgage companies were lending to people with questionable credit," said ABC's David Muir.

But it is not as if lending companies run around just handing out money to bad credit risks, people actually have to apply for home loans because they want to buy a home. Both ABC and CBS missed that.

Instead Muir's "World News" report pitied one couple "fighting to hold on."

CBS "Evening News" quoted Iowa's attorney general who called high-risk subprime loans "unfair" as well as "unwise and unsafe" on March 13. CBS reporter Anthony Mason also included the worries of an analyst who described the worst-case scenario of a housing-led recession.

"But at the very least, Josh Rosner [the analyst] says the housing market has 12 to 36 months of difficult times ahead," Mason stated.

But NBC "Nightly News" was much more accurate.

"Remember, we've had a very easy lending environment for several years now. People took out loans who probably couldn't afford them," explained CNBC's Maria Bartiromo.

http://newsbusters.org/node/11421

 

[jasendorf]

Lenders have been emboldened to take greater risks on home loans due to the Bush Administration's rework of the bankruptcy laws. In turn, they gave credit to anyone with a pulse.

Now, due to lenders' lack of diligence (and their glossy ads which more or less said, "No money? No Credit? No Job? Barely A Pulse? WE HAVE A HOUSE FOR YOU!") they opened people up to the American Dream knowing full well that what they were really selling were ARMs these people wouldn't be able to keep up with.

Despite all the braggadicio by President Bush about an "ownership society" all he has brought us is a "debtor society."

 

[Mr.Conley]

Lenders have been emboldened to take greater risks on home loans due to the Bush Administration's rework of the bankruptcy laws. In turn, they gave credit to anyone with a pulse.

Now, due to lenders' lack of diligence (and their glossy ads which more or less said, "No money? No Credit? No Job? Barely A Pulse? WE HAVE A HOUSE FOR YOU!") they opened people up to the American Dream knowing full well that what they were really selling were ARMs these people wouldn't be able to keep up with.

Despite all the braggadicio by President Bush about an "ownership society" all he has brought us is a "debtor society."

Seconded, these lending companies were making stupid loans. Heck, it's built into the name: subprime loans. These companies went out and offered the most reckless loans imaginable to the desperate. Now everyone, customer and company, is screwed, and worse, the slowdown they're creating is urting the economy.

 

[5stringJeff]

I certainly have no love for sub-prime lenders, and even less for payday-loan lenders (a related, but different story). But no one forced these people to buy more house than they could afford. If they suddenly can't afford the house payments which they knew would be coming (since lenders have to make full disclosure of such things), it's their fault.

 

[trobinett]

I certainly have no love for sub-prime lenders, and even less for payday-loan lenders (a related, but different story). But no one forced these people to buy more house than they could afford. If they suddenly can't afford the house payments which they knew would be coming (since lenders have to make full disclosure of such things), it's their fault.

You mean it ISN'T Bush's fault?

Your going to really piss off some Dem's.

 

[jasendorf]

The lenders have the most responsibility here. They pimp these loans to inexperienced buyers knowing that they'll get most of the interest and some payments and then the house when it all goes downhill. Hate to say it, but a good chunk of these buyers who are in trouble were rubes... people who wanted to touch that American Dream so bad they'd have bought anything the lender sold them.

"I can own a house?!?!?"
"Yes, you can own your very own home!"
"But, isn't that expensive?"
"Well, not if we do the financing right, it'll be more or less what you'd pay in rent!"
"Really?"
"Well, you are planning on bettering yourself over the upcoming years aren't you?"
"Of course! I'm planning on going from burger station to the pick-up window next month even!"
"Well, then if you keep on that course of success, you'll be able to make these payments when they correct themselves. Unless you're lazy or something..."
"I'm not lazy! I can do it!"
"Oh, we're sure you can *wink*"


In the meantime, the Bush Administration slipped what little protection this inexperienced home buyer had out from under him when he and The Party changed the bankruptcy rules. No longer would the lender need to have some sort of criteria in place... they'd simply stick it to them when the borrower tried to escape from what he could no longer afford. Those rule changes were supposedly going to bring us all lower credit card rates remember? Raise you hand if you've gotten a letter from your bank telling you that your credit card rates were going down now that people can't "run from their debt" anymore.

 

[5stringJeff]

When you can show me a company that forced someone to get a loan with them, then I'll show you a company that deserves the lion's share of the blame for a foreclosure.

 

[jasendorf]

When you can show me a company that forced someone to get a loan with them, then I'll show you a company that deserves the lion's share of the blame for a foreclosure.

In other words... "There's a sucker born every minute, and they deserve to be suckered."

 

[red states rule]

Lenders have been emboldened to take greater risks on home loans due to the Bush Administration's rework of the bankruptcy laws. In turn, they gave credit to anyone with a pulse.

Now, due to lenders' lack of diligence (and their glossy ads which more or less said, "No money? No Credit? No Job? Barely A Pulse? WE HAVE A HOUSE FOR YOU!") they opened people up to the American Dream knowing full well that what they were really selling were ARMs these people wouldn't be able to keep up with.

Despite all the braggadicio by President Bush about an "ownership society" all he has brought us is a "debtor society."

What nerve! Lenders expecting people to pay back the money they borrow. Have they no shame?

 

[red states rule]

The lenders have the most responsibility here. They pimp these loans to inexperienced buyers knowing that they'll get most of the interest and some payments and then the house when it all goes downhill. Hate to say it, but a good chunk of these buyers who are in trouble were rubes... people who wanted to touch that American Dream so bad they'd have bought anything the lender sold them.

"I can own a house?!?!?"
"Yes, you can own your very own home!"
"But, isn't that expensive?"
"Well, not if we do the financing right, it'll be more or less what you'd pay in rent!"
"Really?"
"Well, you are planning on bettering yourself over the upcoming years aren't you?"
"Of course! I'm planning on going from burger station to the pick-up window next month even!"
"Well, then if you keep on that course of success, you'll be able to make these payments when they correct themselves. Unless you're lazy or something..."
"I'm not lazy! I can do it!"
"Oh, we're sure you can *wink*"


In the meantime, the Bush Administration slipped what little protection this inexperienced home buyer had out from under him when he and The Party changed the bankruptcy rules. No longer would the lender need to have some sort of criteria in place... they'd simply stick it to them when the borrower tried to escape from what he could no longer afford. Those rule changes were supposedly going to bring us all lower credit card rates remember? Raise you hand if you've gotten a letter from your bank telling you that your credit card rates were going down now that people can't "run from their debt" anymore.

Did anyone hold a gun to the borrower's head and force them to sign? Liberalism will always blame the lender and corporations for the stupidity of the people who borrow money and cannot pay it back

 

[red states rule]

In other words... "There's a sucker born every minute, and they deserve to be suckered."

People who voted for the Democrats last November can understand that statement right now

 

[Mr.Conley]

When you can show me a company that forced someone to get a loan with them, then I'll show you a company that deserves the lion's share of the blame for a foreclosure.

Well Jeff, the primary concern here isn't just that these people took out stupid loans, which they did. Tactics aside, look what happened. If you read the article you'll note that these companies are going bankrupt and watching their stock prices fall, destroying value to the tune of 10's of billions. That is, in part, what's causing the slowdown we're seeing now, and, unfortunately, as the article notes this cycle can become selfsustaining. That not only threatens debters who've taken out loans from these companies which are probably going to be called in at a faster rate, thereby encouraging more foreclosures, but threatens the US economy, which sustains itself increasingly on consumer spending, which itself has been fueled largely by the housing boom of late. Now that the boom is over and prices are slumping we could see a positive feedback loop of sorts that might throw the whole economy out of tilt. What these companies did by making these loans is give us less wiggle room for when things started to cool off. Now we're paying for it.

At first I thought the Dow's original fall might be nothing more than an abberation, but a second shock like this gets me worried. I'm not saying that we're going to head for a recession or depression yet, but don't expect the heady economic growth we were seeing for a while.

 

[red states rule]

The primary reason people cannot make their house payment is not because the P&I payment is to hight it is because of increasing taxes and insurance

If they have an escrow account the payment can go up by hundreds of dollars

BTW the worst states for are NJ, NY, PA, and CA. Who runs these states? Taxacrats Democrats

 

[manu1959]

a sub prime loan....hello....if it looks to good to be true....

 

[Mr.Conley]

When you can show me a company that forced someone to get a loan with them, then I'll show you a company that deserves the lion's share of the blame for a foreclosure.

One other thing I have to add is that while I completely agree with your libertarian bent, what these companies did hurt not only their debters but also themselves. These are just plain stupid loans to make. Interest only, high risk, low equity mortgages. Plus they targeted people who obviously have little understanding of debt (why else would they take these loans). These companies played on people's emotions inorder to knowingly manipulate them into debt slaves. They used hyperbolic advertisements, "introductory" rates, gimmicks, and half-truths. Sure, they didn't cross the legal border, but they crossed the moral one, and the new bankruptcy laws only encouraged them. Now everyone pays the price. Goodbye stock gains for the year to today; hello debt slaves.

 

[red states rule]

One other thing I have to add is that while I completely agree with your libertarian bent, what these companies did hurt not only their debters but also themselves. These are just plain stupid loans to make. Interest only, high risk, low equity mortgages. Plus they targeted people who obviously have little understanding of debt (why else would they take these loans). These companies played on people's emotions inorder to knowingly manipulate them into debt slaves. They used hyperbolic advertisements, "introductory" rates, gimmicks, and half-truths. Sure, they didn't cross the legal border, but they crossed the moral one, and the new bankruptcy laws only encouraged them. Now everyone pays the price. Goodbye stock gains for the year to today; hello debt slaves.

to libs, it is not the fault of the people who willingly agreed to the loan, signed the papers, and promised to pay the money back

again, did naybody force them to take the loan?

 

[manu1959]

One other thing I have to add is that while I completely agree with your libertarian bent, what these companies did hurt not only their debters but also themselves. These are just plain stupid loans to make. Interest only, high risk, low equity mortgages. Plus they targeted people who obviously have little understanding of debt (why else would they take these loans). These companies played on people's emotions inorder to knowingly manipulate them into debt slaves. They used hyperbolic advertisements, "introductory" rates, gimmicks, and half-truths. Sure, they didn't cross the legal border, but they crossed the moral one, and the new bankruptcy laws only encouraged them. Now everyone pays the price. Goodbye stock gains for the year to today; hello debt slaves.

not all sub prime lenders failed....and not every house with a subprime loan is in forclosure.....

 

[Mr.Conley]

not all sub prime lenders failed....and not every house with a subprime loan is in forclosure.....

Obviously, but look at the effects thus far. The Dow's down nearly 500 points, destroying all the gains thus far. People are freaked, investors are worried. Of course subprimes aren't the only problem, but they've taken the situation and made it much, much worse then it had to be. Already some of the markets biggest subprime lenders are on the fritz. Not a good sign. If this effect continues then the accumulated effect could raise rates higher and then things could get really bad. Consider:
The savings rate is negative, yes negative, 1%, down from a historical average of almost 10%

Wages are still flat for the middle class

The Democrats are probably not going to renew the tax cuts

The international markets are jittery, especially in China

The carry trade in Japan continues to distort the Yen, hurting our trade balance with that country

The Yuan continues to remain artifically low

The trade balance, though down, is still huge

The deficit is still large

Productivity gains have flatlined

New housing orders and home prices are down, that means the construction industry is going to hit a slowdown, which means less jobs in what has been the biggest new employer of the past several years

GDP growth hit 2.2% last quarter, worse then most of Europe

Again, I'm not saying there's going to be a recession tomorrow, but things aren't good, and the subprimes have only made the situation worse.

 

[manu1959]

Obviously, but look at the effects thus far. The Dow's down nearly 500 points, destroying all the gains thus far. People are freaked, investors are worried. Of course subprimes aren't the only problem, but they've taken the situation and made it much, much worse then it had to be. Already some of the markets biggest subprime lenders are on the fritz. Not a good sign. If this effect continues then the accumulated effect could raise rates higher and then things could get really bad. Consider:
The savings rate is negative, yes negative, 1%, down from a historical average of almost 10%

Wages are still flat for the middle class

The Democrats are probably not going to renew the tax cuts

The international markets are jittery, especially in China

The carry trade in Japan continues to distort the Yen, hurting our trade balance with that country

The Yuan continues to remain artifically low

The trade balance, though down, is still huge

The deficit is still large

Productivity gains have flatlined

New housing orders and home prices are down, that means the construction industry is going to hit a slowdown, which means less jobs in what has been the biggest new employer of the past several years

GDP growth hit 2.2% last quarter, worse then most of Europe

Again, I'm not saying there's going to be a recession tomorrow, but things aren't good, and the subprimes have only made the situation worse.

every 8-10 years this happens.....forgot what the deal was in 75 and then again in 84 .... then 93 and now 07.....the economy cycles....blame the subprimes......if wall street did invest in stupid shit the sub primes wouldn't exist....