Poor credit borrowers feeling wrath of slow market

The housing market has been falling, falling fast and hard in recent months. As mortgage originations and home sales are down, economists have been waiting for borrowers’ credit problems to emerge.

Borrowers who opted for subprime loans, with poor credit and limited finances, are particularly feeling the wrath of the market’s rising interest rates.

The August 30, 2006 article, “Mortgage Market Begins to See Cracks
As Subprime-Loan Problems Emerge,” written by Jesse Eisinger of The Wall Street Journal, explores the potential hazards subprime loan lenders are about to face now and for at least the next few months.

“As homes sales have fallen and borrowing costs have edged higher, the mortgage business has slowed down. The big question is whether credit-quality deteriorates. While customers have been able to pay off loans in high numbers for years, the markets are seeing the first glimmerings of problems among customers with poor credit.”

Subprime lenders are those who generally had credit problems and chose a nontraditional loan with higher adjustable interest rates just to be able to qualify for a mortgage.

Mortgage companies expect subprime lenders to be the majority of borrowers who will default on payments in a normal market. Those expectations have increased during the current volatile higher interest rate market.

“Last week, H&R Block, the big tax preparer, alerted Wall Street that its Option One Mortgage unit, which focuses on the subprime market, would have to set aside about $60 million, or 19 cents a share, because borrowers were falling behind on their payments.”

“Customers of Countrywide Financial, which has products across the credit-quality spectrum, are paying loans off more slowly, as are those at subprime companies Impac Mortgage and Accredited Home Lenders. Mortgage companies, such as regional bank Fremont General, have begun putting money aside to account for loans going bad.”

As of right now, defaulted and late payments are relatively low. Then again, this cooling market trend appears to be in its early stages.

Yesterday (August 29, 2006) First Horizon National reported its first major concern, saying that mortgage volume was falling so drastically that it expected to miss its target earnings for this current quarter. But less than 5 percent of First Horizon's mortgage loans are lent to borrowers with poor credit.

“Marty Mosby, the bank's chief financial officer, says he's not worried about credit problems, which have been low as a percentage of loans. ‘We don't see any trends that say it's going to swing very dramatically,’ he says.”

Most other mortgage companies can not agree with Mosby. Basically what happened during the housing “boom” is that many mortgage lenders lowered their standards regarding accepting applications.

The demand for mortgages was so high that companies were accepting them because they knew people would pay the higher rates and longer terms because everyone needed to buy a home at that time.

These companies didn’t bother to think what would happen if rates drastically rose, subjecting subprime borrowers to defaulting on payments.

“Now, with the mortgage market slowing and the secondary market for mortgage-related securities faring modestly worse than in the past, investment banks are scrutinizing the loans that come into their sausage factories more carefully.”

This trend is going to continue, with no immediate relief in sight. The market is correcting itself and mortgage originators and borrowers who went the subprime way are going to feel the brutal effects.

Back to Articles