Trading was halted in New Century Financial on Monday with the second-largest US subprime lender teetering on the edge of bankruptcy, sparking fresh fears about whether turmoil in the sector could spread and damp US economic growth.
Some economists also fear that the collapse in subprime loans could trigger wider house price falls.
Originally posted by Gools
The subprime market is an absolute bloodbath and leading the housing collapse!
Since the end of 2006 until today there are a total of 31 mortgage lenders who have gone out of business! You can keep track of all of the sordid details here:
The Mortgage Lender Implode-O-Meter
I set this page up on December 31, 2006, to keep track of mortgage lenders in the US going bust since approximately December 2006, when it seems the first of them started going under. Many observers (including myself) had been anticipating this for some time, as rising home prices (and other financial assets) have collided with the deteriorating consumer balance sheet and low-as-they-can-possibly-go interest rates (heavily reliant on the dole of China and the oil exporters).
It appears what had to give is now finally giving: the latest subprime loans are going delinquent the quickest, and it seems likely that their prior kin will soon follow (and many of these will likely end up in foreclosure). Further, I expect a large swathe of prime loans to go bad (the prime/subprime distinction is quite fuzzy anyway). Originators cannot handle the buybacks, and so when challenged by them are immediately folding. The phenomenon is just getting started. What will the banking industry—often all or part owners in these enterprises—do? Stay tuned.
List of the Defunct Lenders:
This is our list of lending operations that have shut down (see also ailing lenders). This includes all types (prime, subprime, or a mix of both; retail or wholesale; subsidiaries and entire companies) as well as modalities (exiting the business, shutting down under distress, voluntary or forced by MBS buyers, or going bankrupt). The list, with links to stories and whatever details we have available (most recent first) follows: [see link for all the info]
Many have been watching the carnage since early this year:
Subprime Lenders gone Too Far - A Time Bomb Waiting to Explode
January 12, 2007
Well guess what - the chickens are coming home to roost. By late in 2006, the rate of subprime loan delinquencies of over 60 days was up to nearly 8% according to UBS. The Center for Responsible Lending (CRL) projects that nearly 20% of subprime loans made in the period 2005 to 2006 will fail. The New York Times stated that “about 2.2 million borrowers who took out sub-prime loans from 1998 to 2006 are likely to lose their homes”. One of my favorite commentators, Peter Schiff, believes the the NY Times estimate are too optimistic.
Subprime Titanic Hits Iceberg!
February 22, 2007
Between reps and warranties and widening mortgage credit spreads, most subprime lenders will end up closing down or heading to Federal Bankruptcy Court. Indeed, even mortgage firms with limited exposure to subprime loans could fail. Even if a mortgage company survives, it will now have to dramatically raise interest rates to borrowers and put in place sound loan underwriting.
Market reports show that at least 21 sizeable subprime lenders have already shut down or filed bankruptcy [as of Feb 22 - 10 more since then!], and the head of Countrywide Financial estimates that as many as 20 to 30 small mortgage originators are failing every day!
In markets where prices are failing like a stone, lenders will be dangerously exposed to serious losses.
Anyone aware of the fraud and foolish underwriting that has been ongoing in mortgage origination should be honest enough to admit we’ve only seen the “tip of the iceberg” so far, and mortgage lending is heading straight towards a massive piece of ice.
All of the recent fun in the stock markets is related to this imploding bad debt situation.
Last week there were rumours that HSBC was in some kind of trouble. The Hongkong and Shanghai Banking Corporation (HSBC) is one of the largets banks in the world with deep rooted ties to China. Over one quarter of US motgage debt is owned by "Chinese" interests. You will recall that I had speculated about something like this. Well...
Today HSBC has announced that they will be taking an $11 billion dollar hit due to bad US loans. That's gonna leave a mark!
HSBC reportedly to write off $11 billion on U.S. mortgages
Last Update: 5:44 AM ET Mar 4, 2007
LONDON (MarketWatch) -- HSBC Holdings will take a charge of $11 billion to cover the bad debts seen by its acquired Household division in the U.S., according to reports from the Sunday Times and Sunday Telegraph newspapers. HSBC reports its annual results on Monday. The bank recently issued its first profit warning over mounting bad debts in the U.S.
Here's coverage in Forbes from yesterday: Subprime Virus On Wall Street
And this from Today's New York Times:
Mortgage Crisis Spirals, and Casualties Mount
Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.
Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure.
Things are quickly getting so bad that household names like Goldman Sachs and Merrill Lynch and Morgan Stanley now have credit ratings of Junk Status because of their exposure to bad debts Reported by Bloomberg the other day:
Goldman, Merrill Almost `Junk,' Their Own Traders Say
March 2 (Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.
Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.
Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms.
Like I said last week... this ain't over... not by a long-shot.
Originally posted by Justin Oldham
Anyone who can ride it out stands to gain from it on the other side.
What fed the subprime lending spree?
Some experts are pointing to a securitization equation: No consequences for loan originators + investors bundling risky loans = a menu ripe for subprime abuse.
TEXT OF STORY
MARK AUSTIN THOMAS: Some experts are tying the crisis in subprime lending to the apparent abuse of a financial innovation. That innovation's called "securitization." It's the packaging of mortgage loans into salable securities. Marketplace's Steve Tripoli explains how securitization might have fed the subprime lending spree that's now unraveling in bad loans and corporate collapse.
STEVE TRIPOLI: Securitization greatly expands available credit. But it also off-loads risk.
Loan originators no longer hold the consequences of reckless lending. Investors believe that bundling risky loans makes them safer. Put the two together and the folks making the money are all looking the other way.
Atlanta CPA Kevin Byers analyzes such transactions. He says securitization helped and hurt the wrong people.
KEVIN BYERS: To the extent that that money is available in abundance for loans with looser underwriting guidelines, essentially giving borrowers enough rope to hang themselves with. Or, for that matter, giving people that are out to commit fraud the liquidity to do so. In the end, it's going to hurt the legitimate borrowers.
So does Byers think securitization may have triggered some subprime abuses?
BYERS: It funded it, so, you can follow the money. And in my business, that's how we get to our answers.
Some investors of course will be hurt. And regulators who'd been warned will have egg on their faces. But the bigger worry now is that all this will spill into the wider economy.
Originally posted by JackCash
So what does this mean for those of us who have credit card debt and are home owners?