Wednesday, February 28, 2007

Is the US housing market's house of cards starting to totter?

Wall Street Journal: Freddie Won't Buy Some Subprime Loans (reprinted in full for your benefit, since WSJ insists on hiding their prose behind a subscribers-only firewall)
Pressure is increasing on mortgage lenders to stop offering loans that subject borrowers to steep increases in payments after the first two or three years.
Freddie Mac, one of the biggest providers of funding for U.S. home mortgages, said yesterday that it plans to quit purchasing such loans granted to subprime borrowers, or those with weak credit records. Subprime lenders depend on their ability to sell loans -- often packaged into securities -- to investors such as Freddie and rival Fannie Mae.
In another sign of turmoil in the industry, subprime lender Fremont General Corp. said late yesterday that it will postpone the release of its fourth-quarter results, originally due today. The Santa Monica, Calif., company offered no explanation, but said it would explain the delay in a filing with the Securities and Exchange Commission. Company officials couldn't be reached for comment. Fremont was the seventh-largest subprime mortgage lender last year, with a market share of about 5%, according to Inside Mortgage Finance, a trade publication.
Freddie's move adds to pressure already applied by lawmakers -- notably Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, and Sen. Christopher Dodd (D., Conn.), head of the Senate Banking Committee -- who are urging bank regulators to crack down on these loans. Both lawmakers praised Freddie Mac's announcement. "It is responsible, and it demonstrates how [Freddie and Fannie] can be a force for good," Mr. Frank said.
A surge in subprime mortgage lending propelled the housing boom in the first half of this decade by making it possible for more Americans to buy homes. New subprime loans granted in 2006 totaled about $605 billion, or more than 20% of the total mortgage market, up from $120 billion, or about 5%, in 2001, according to Inside Mortgage Finance. But a surge in defaults on subprime loans in recent months has alarmed investors and politicians, who fear foreclosures will force large numbers of people from their homes. The Center for Responsible Lending, a nonprofit research and lobbying group, estimates that 2.2 million subprime loans, or about 15%, originated between 1998 and the third quarter of last year will end in foreclosure. That includes about 488,000 foreclosures already recorded.
Freddie said that effective Sept. 1, it will stop buying subprime loans that are likely to lead to a "payment shock" when rates are reset after two or three years. Freddie officials said a typical borrower who got a $150,000 loan with a starting interest rate of 5.5% two years ago might now face a reset to 12%, raising monthly payments 75% to nearly $1,500. The company said it is working with big lenders to develop subprime loans with longer fixed-rate terms -- perhaps the first five years -- and less scope for sudden jumps in payments. In granting the loans, Freddie said, lenders will have to determine that the borrower can cope with the higher payments likely to kick in after the initial "teaser" period. Fannie said it has bought subprime loans and securities "very carefully" and is working with lenders on mortgages that will help borrowers struggling with payment shock. The company also said it is awaiting guidance from regulators.
Richard Syron, chairman and chief executive of Freddie, said in an interview the company's stand could lead to a "substantial reduction" in subprime loans that allow for payment shocks. The Mortgage Bankers Association, a trade group in Washington, said Freddie's plan "will limit the product options and the access to credit for those individuals most in need, many of whom are first-time, underserved or minority home buyers." A spokeswoman for New Century Financial Corp., Irvine, Calif., one of the nation's biggest subprime lenders, said Freddie's plans seem "directionally consistent with some of the changes we have made and are making, although Freddie's approach appears to be more sweeping." Freddie and Fannie bought about a fifth of subprime mortgage securities issued last year, according to Inside Mortgage Finance.

And here's what my good friend who goes by the monniker Charles Farley had to say about this:

subject: Lee, the beginning of the perfect storm...

Start by taking the sub-prime borrowers out of the market. Add a huge new home inventory, mix in a bit of an increase in the foreclosure rate and toss in a dabbling of a stock market shock (which is code for an aversion to risky investments) -- we are going to bake us up a prime vulture oriented market for housing in the US.

Negative equity...here we come!

You heard it here first!

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