Couldn't Pick a Title for This One

Yesterday's WSJ report More Borrowers With Risky Loans Are Falling Behind($) was so chock-full of juicy quotes that it was impossible to pick a title for this post.

You see, sometimes when a blogger starts slacking off leading up to the year-end holidays, the easiest thing to do to fulfill the daily requirement for new material is to just find a good article, use the most titillating quote as the title, excerpt a few paragraphs and voila! - another blog post is done.

The story by Ruth Simon and James Hagerty was so full of zippy one-liners that it would have been unfair to all the others to pick just one. Here's a partial list of what was under consideration before arriving at the title you see above:

• "We are a bit surprised by how fast this has unraveled," says Thomas Zimmerman, head of asset-backed securities research at UBS
  
  
• KeyCorp was leaving the subprime market because "it no longer fits with our long-term strategic priorities"
  
  
• In retrospect, "the tightening process should have started a bit earlier," says James Konrath, Accredited's CEO
  
  
• In many cases these loans are "so bad right off the bat"

From this, snappy titles could have been easily extracted:

• Surprised By How Fast It Unraveled
  
• It No Longer Fits with their Long-Term Strategy
  
• Tightening Process Should Have Started Sooner
  
• So Bad Right Off the Bat

Indecisiveness such as this has never occurred here before. Of course developments such as those now unfolding in the mortgage lending industry have never occurred before either.

The story goes on at great length about the quandary faced by both lenders and borrowers now that the bloom has come off of the housing boom.

Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace.

The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors world-wide in the $10 trillion U.S. mortgage market. The pain is most apparent in subprime mortgages, though there are signs it is spreading to other parts of the mortgage market.

Subprime mortgages are loans made to borrowers who are considered to be higher credit risks because of past payment problems, high debt relative to income or other factors. Lenders typically charge them higher interest rates -- as much as four percentage points more than more-credit-worthy borrowers pay -- one reason subprime mortgages are among the most profitable segments of the industry.

They also have been among the fastest-growing segments. Subprime mortgage originations climbed to $625 billion in 2005 from $120 billion in 2001, according to Inside Mortgage Finance, a trade publication. Like other types of mortgages, subprime home loans are often packaged into securities and sold to investors, helping lenders limit their risks.

Until the past year or so, delinquency rates were low by historical standards, thanks to low interest rates and rising home prices, which made it easy for borrowers to refinance or sell their homes if they ran into trouble. But as the housing market peaked and loan volume leveled off, some lenders responded by relaxing their lending standards. Now, the downside of that strategy is becoming more apparent.

Translation: What appeared to be a free lunch really wasn't. Despite early 21st century conventional wisdom, all of Western Civilization cannot become rich at the same time just by bidding up the price of each others' homes.

How did this all start anyway?

The subprime industry's current troubles can be traced back to 2003 and 2004, when defaults were unusually low. Investors who purchased these loans did well and were eager to buy more. That encouraged lenders to lower their standards, making loans to more people with low credit ratings. Lenders also grew less inclined to demand full documentation of income and assets and more willing to offer "piggyback" loans that allowed borrowers to finance 90% or 100% of the purchase price without being required to buy private mortgage insurance.

Many lenders kept introductory "teaser" rates low even after short-term interest rates began rising in June 2005, while increasing the amount the rate could rise on the first adjustment. That meant borrowers would face sharply higher costs when their monthly payments were reset.

Fraud has also increased. Some borrowers who took out no- or low-documentation loans were coached by loan officers or mortgage brokers to inflate their incomes and couldn't afford even their first mortgage payment, says Theresa Ortiz, a foreclosure manager with Neighborhood Housing Services of New York City, a nonprofit that works with homeowners in financial trouble.

Another report yesterday, this one on record foreclosures in the Denver area, provides a good indication of what may come next to a neighborhood near you.

But it's never been easier to qualify for a loan, so many people who would have been unable to buy a home previously can now buy one, he said.

Despite rising foreclosures, Barnes said there has been no move to tighten borrowing requirements because the federal government wants to encourage homeownership.

Previously hot markets such as the West Coast, Phoenix and Las Vegas now are softening. In those cities, unlike in Denver, many of the buyers were people speculating on rising home prices in order to flip properties quickly for a profit.

Said Barnes: "If the national lag in these 'bubble zones' is anything like the lag we saw after the technology crash," he predicts other cities will see an increase in the foreclosure rate similar to Denver's.

"I think (the metro area's record foreclosures) are very significant for the rest of the country," he said.

Maybe it should be a little harder to buy a house.