Easy Money Meltdown Roundup

Just a small part of the overall mortgage market is being affected by recent developments in subprime lending, but, making up 20 percent of all new loans over the last two years, subprime borrowers have had an outsized impact on setting prices for real estate all across the country.

This will likely affect the rest of the housing market - to what extent is unknown.

Wednesday's revelations by giant HSBC that its provisions for bad debt would rise by $1.7 billion as a result of continuing mortgage defaults by U.S. borrowers has roiled markets to be sure. The Wall Street Journal reports($) that other subprime lenders are being affected.

New Century Financial Corp. shares dropped $10.92, or 36%, to $19.24 in 4 p.m. composite trading on the New York Stock Exchange after the big Irvine, Calif., lender disclosed late Wednesday that it expects to report a fourth-quarter loss and will restate results for the previous three quarters to correct accounting errors.

New Century is one of the nation's biggest specialists in "subprime" mortgage loans, or home loans for borrowers with weak credit histories. The company blamed its woes on "the increasing industry trend of early-payment defaults," those that occur within the first few months after a loan is made.

Shares of other subprime lenders, including Fremont General Corp. and NovaStar Financial Inc., also plummeted. The combined market value of seven U.S.-based lenders active in the subprime market dropped more than $3.7 billion yesterday.

The chart below shows HSBC Holdings (HBC) along with New Century Financial (NEW), Fremont General (FMT), and Novastar (NFI). It was a bad day - perhaps the first of many.


In Subprime Time Bomb, BusinessWeek reports on the prospects for Countrywide Financial (CFC) and, in the process, we learn a new word. A word that is not likely to be seen again and surely never used here - leitmotif ("a dominant recurring theme").

"Just because some subprimers are bad doesn't mean all are," says Stuart Plesser, a mortgage lender and insurer analyst for Standard & Poor's Equity Research. "Countrywide will suffer because they are going to face a pricing issue." Plesser has a "sell" rating on Countrywide, the No. 1 mortgage originator and fourth largest subprime mortgage originator in the U.S., according to National Mortgage News.

Many mortgage lenders, including Countrywide and New Century, sell their loans to banks and investors that are attracted to the high interest rates they carry. HSBC got into subprime during the U.S. housing market boom, but when the market began to cool and foreclosure trends accelerated, the bank found itself in trouble. Washington Mutual, another big player in the subprime market, said in January that its mortgage business lost $122 million in the fourth quarter thanks entirely to losses in its subprime segment.

"This is the leitmotif of this whole thing: These people don't really know what they are doing in mortgage banking," says Plesser. "They are writing whatever loans just to write loans, thinking they will worry about it later. But now it's later."

This story from CBS MarketWatch tells of the quickening pace of foreclosures and problems with subprime lenders including Washington Mutual (WM).

Signs of credit deterioration from the slowing U.S. housing market have already shown up in recent results of other banks as more borrowers fall behind.

Foreclosures jumped 35% in December versus a year earlier, according to recent data from RealtyTrac. For the fifth straight month, more than 100,000 properties entered foreclosure because the owner couldn't keep up with their loan payments, the firm noted.

In January, Washington Mutual said its mortgage business lost $122 million in the fourth quarter, highlighting the weak sub-prime market.

Also from MarketWatch comes news of trouble developing in mortgage-backed securities, once the exclusive domain of Government Sponsored Entities Fannie Mae and Freddie Mac, but now a virtual free-for-all on Wall Street.

There were also reports of heavy selling of home-equity collateralized debt obligations, traders said. These are structured finance products, similar to a mutual fund, in which owners buy a stake in a pool of mortgages or home-equity loan products.

Rod Dubitsky, a fixed-income analyst at Credit Suisse, wrote in a research note that his agency is reviewing for possible downgrades 24 asset-backed securities that were created from sub-prime home-equity deals in 2006, a vintage year for such deals.

Frequent commenter Aaron Krowne can keep you up to date with all the goings on in subprime lending. His Mortgage Lender Implode-O-Meter website tracks "the housing finance breakdown: a saga of corruption, stupidity, and government complicity."


It's hard to argue with that characterization of contemporary mortgage lending or the selection of graphics for his website.

Full Disclosure: No position in HBC, NEW, FMT, NFI, CFC, or WM at time of writing.