Lending Industry Woes! Heads Up!

"The Next Skeleton To Fall Out Of The Closet"

from The Housing Bubble Blog on 03.Mar.07 at 08:20AM

A report from the New York Times. "Federal prosecutors and securities regulators are investigating stock sales and accounting errors at the New Century Financial Corporation, the biggest mortgage company that specializes in lending to people with weak, or subprime, credit, the company disclosed in a corporate filing yesterday."

"The company also warned that a delay in filing its financials may put vital financing into jeopardy. New Century wrote $33.9 billion in mortgages last year. New Century now appears to be facing a credit crunch similar to the one it encountered in the late 1990s."

From MarketWatch. "New Century Financial Corp. said late Friday that it's facing a federal criminal probe and will likely breach a major lending covenant with its financial backers, bringing into question the survival of the second-largest U.S. subprime-mortgage lender."
"The mortgage lender said it expects that it won't report at least $1 of net income for the two quarters ended Dec. 31, as stipulated in covenants with its lenders."

"'Subprime lenders without deposits depend on their warehouse lines," said analyst Zack Gast. 'If New Century's lenders do not grant the requested waivers, the company is likely to be forced to sell or shut down.'"

"Indeed, New Century warned that if it can't get waivers or covenant amendments from enough of its financial backers, the company's auditor, KPMG, will conclude 'that substantial doubt exists as to the company's ability to continue as a going concern.'"

The LA Times. "Federal regulators have leveled civil accusations against the No. 2 independent sub-prime lender, Fremont General Corp. of Santa Monica. Fremont disclosed Friday in an SEC filing that the Federal Deposit Insurance Corp. would sanction its bank subsidiary, Brea-based Fremont Investment & Loan, for failing to control the risks inherent in sub-prime lending and in its second major business, commercial real estate construction loans."

"The company said it had decided to quit sub-prime lending entirely."

"The FDIC said Fremont failed to make proper allowances for its 'large volume of poor quality loans' and operated with inadequate capital. The regulator said Fremont had increased defaults by selling loans with low 'teaser' rates without verifying whether borrowers could afford the eventual full payments."

"Fremont said it expected to agree to a cease-and-desist order from the FDIC that would severely restrict its control over the sub-prime business. It said it would report a loss because of increased provisions for bad loans, but hadn't yet determined the size of the deficit."

From Bloomberg. "Fremont plans to report a net loss from continuing operations in the fourth quarter after setting aside more money to buy back loans that defaulted, the company said in a regulatory filing."

"'It just shows there was a lack of principles and standards,' said analyst David Hendler. 'There was no real major guardian of conservative standards anymore, and that's a danger to the safety of the market.'"

"Two other California lenders, Impac Mortgage Holdings Inc. and Accredited Home Lenders Holding Co., said today they won't be able to file their financial reports on time. Shares of both tumbled."

"Impac found a 'material weakness' in its cash-flow reporting, the Irvine, California-based company said today in documents filed with the SEC. Accredited Home, based in San Diego, delayed its report until March 16 because of 'sizable demands upon the company's management and staff,' including a recent merger that may cause a writedown."

From Reuters. "U.S. homeowners who bought using 100 percent financing, and those who took out 'home equity' loans against the value of their properties, even though they have good credit ratings, could be the next to cause problems in the U.S. housing market."

"Many recent home buyers bought through 100 percent financing programs known as 'piggyback' loans, which relied on one mortgage for 80 percent of purchase price and other financing for the remaining 20 percent."

"'Piggyback loans could be the next skeleton to fall out of the mortgage industry closet,' said Howard Glaser, an independent mortgage analyst. 'These 80-20 loans give the borrower the illusion of being able to afford more house than they really have the funds for."

"From mid-2005 to mid-2006, 29 percent of new mortgages involved no deposit by the purchaser to create some equity in the property, according to the National Association of Realtors. 'When we went out to visit our clients on the West Coast, this was a prime area of concern,' said Frederick Cannon, a mortgage industry analyst."

"Another type of financing which could cause problems in the housing sector is the 'home equity' loan, taken out by a homeowner against the net value of the property to finance home improvements or other consumer spending. Home equity lines of credit, or HELOCs, grew from $151 billion to $559 billion from 2000 to 2005, according to the FDIC."

"In a regulatory filing Thursday, Countrywide said 2.9 percent of its prime home-equity loans were at least 30 days late at the end of 2006, up from 1.6 percent a year earlier and 0.8 percent at the end of 2004."

"'Second lien holders and second lien HELOC lenders to prime borrowers are in as much of an 'at risk' position as subprime mortgage lenders,' said said Josh Rosner, a housing analyst. 'The recognition of their problems is just ahead of us as they will default more slowly.'"

"Lenders must disclose more information about products such as adjustable-rate mortgages to people with poor credit histories and make sure borrowers are able to repay the loans, according to guidelines issued in Washington today by the Fed, the Federal Deposit Insurance Corp., and other U.S. regulators."

"The intention is 'to limit risks to both the borrower and the lending institution,' Federal Reserve Governor Randall Kroszner said in a statement. Borrowers need 'clear and balanced information on the risks associated with these loans.'"

"Banking regulators expressed concern that lenders are approving adjustable-rate loans without 'appropriate documentation' of the borrower's income, according to today's guidelines."
"The Mortgage Bankers Association, a Washington-based trade group, said the recommendations go too far and lender closings show the market is fixing itself."

"'A number of firms, which made weaker loans, have been forced out of business simply because the loans didn't perform as they proposed,' Doug Duncan, the group's chief economist, said in an interview. 'The guidance has the potential of overreaching and constraining credit availability to people who need it.'"

The Boston Globe. "Recently, CEO Michael Geoghegan explained that massive losses in HSBC's home mortgage lending business were caused by the mistake of 'going for volume.' Investors forget that for every 'bad' loan in their portfolio, there is a family facing foreclosure on the other end. Indeed, last month Massachusetts broke an all-time record with lenders notifying 2,207 families of impending foreclosure, nearly double this time last year."

"No doubt much of the bout of pain in mortgage lending is due to the slowdown in real estate sales. But it is not like the slowdown in the real estate market should have surprised anyone, especially mortgage lenders."

"It is time to re think national credit policies. Leaders should learn at least three lessons from the latest shakeout in the mortgage lending business. First, consumer protection laws not only protect borrowers, but also the economy. Second, it is time to hold middlemen responsible for transferring ill-advised loans from unsuspecting borrowers to unsuspecting investors."
"Third, waiting will not make this problem go away."

"The Federal Reserve's monetary-policy playbook hasn't become obsolete because of the growing global nature of the U.S. economy, Ben Bernanke said in an address on Friday night."
"The Fed chairman didn't address this week's market turmoil but he did comment on the concerns about the quality of debt in the subprime-lending market, saying the Fed is 'obviously going to watch it very closely.'"

"'Globalization has not materially affected the ability of the Federal Reserve to influence financial conditions in the United States nor has it led to significant changes in the process which determines the U.S. inflation rate,' the central bank chief said."

"But globalization has made it more difficult to assess domestic economic conditions, Bernanke said. 'Effective monetary policy making now requires taking into account a diverse set of global influences, many of which are not fully understood,' Bernanke said. 'A clear resolution of the question of how global economic conditions affect domestic inflation may continue to elude us,' he said."