In case you haven't been watching the markets last week and yesterday, major sub-prime lenders are suffering and dying at an alarming rate of speed. D1, a subsidiary of HSBC reported writing off $10.6 billion in bad sub-prime loans in 2006. New Century, which is one of the top 5 sub-prime lenders in the country is rumored to be closing today, and Fremont Investment, another big sub-prime lender announced it was closing it's door yesterday. In addition, there have been many smaller sub-prime lenders that served the market with useful niche products who have also already gone out of business in the past few weeks. What does it all mean?
Well, all the federal and state government efforts to "fix" the mortgage industry may be a big waste of time as the industry is in the process of self correcting through market forces, imagine that. It is starting to look like the big problems that our wise government was blaming on unscrupulous mortgage loan officers was as much or more of an issue with overzealous lenders who were desperate to keep showing higher revenues and profits, and had to turn to more and more risky products to do that because all the "A" borrowers had already been taken care of when mortgage interest rates dropped over the past few years.
Secondly, if you think the foreclosure rate is high now, fasten your seat belts! One of my best sub-prime lenders and also one of the top 5 lenders in the country told me yesterday that it is going to be almost impossible to find 100% financing for the sub-prime borrowers. What this means is that as all the sub-prime 2 year ARMs come due and threaten to adjust UP roughly 2% points, seriously crushing the cash-flow of these home owners, they will have nowhere to go. Over the past 5 years these people were able to do a cash-out refinance to lower or at least keep their interest rate and payment the same while they tried to get their spending behavior under control and improve their credit scores so they could come back to the market and finally qualify for the coveted "A" paper 30 year fixed mortgage. With lenders closing out the 100% and 80/20 loans, and with home prices being flat or declining in most markets, all these sub-pime home owners will have no where to go but get second jobs or walk away, as in many cases they owe more than their home is worth.
When the dust settles, there will be far fewer sub-prime lenders with far fewer programs that will be much less risky for the investors and those who qualify to purchase a home in this "NEW MARKET" will actually be able to make their monthly payments in a timely manner. Go figure!
Does anyone want to go tell the people in government before they spend millions of dollars fixing a problem that will be mostly self corrected by the end of March?
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