In a recent article by Reuters UK, yet another lender falls victim to the "Mortgage Market Meltdown": "HSBC Holdings, Europe's biggest bank, said on Friday that it would close its U.S. subprime mortgage unit, cutting 750 jobs and taking an $880 million writedown, because the business is no longer sustainable...
It was the latest blow from the meltdown in the U.S. market for loans to home buyers with poor credit histories."
This brings the mortgage lender "death" toll to a whopping 159 since late 2006 (per the Mortgage Lender Implode-O-Meter).
The Problem:
Investors drive the capital markets, in this case the bond markets, that ultimately determine the types of loans that are financed. In this case, the investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans because they are aware that traditionally speaking, these pools will have a higher rate of default and delinquent payments.
But lately, default and foreclosures have been on the dramatic rise which forces investors to demand a higher "risk premium" -or- simply cease purchasing these types of loans.
If investors aren't repurchasing loans, lenders aren't financing them and if they have financed them, then they face liquidity trouble because they're not sale-able in the secondary market and boom...here comes the bankruptcy filing.
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