As Homeowners Face Strains, Market Bets on Loan Defaults
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So far, the [tag]subprime mortgage market[/tag] has held up relatively well. But it’s beginning to show some cracks — most evident in the [tag]nascent derivatives trade[/tag], which provides a useful window into investor sentiment. Since August, when house prices logged their first year-on-year decline in more than a decade, the cost of insurance against defaults on bonds backed by [tag]subprime loans[/tag] has risen as much as 16%, suggesting investors are concerned that more homeowners will start to renege. |
The advent of the subprime market reflects a sea change in the way banks make [tag]home loans[/tag]. As recently as the mid-1990s, potential homeowners had to get over high hurdles to borrow money. Background checks could take weeks or months. Lenders typically required down payments of at least 20% of a home’s value. People with dented credit, or young folks without adequate credit histories, had few if any options. Over the past decade, though, a convergence of factors has emboldened banks to lend where they wouldn’t before. For one, the development of the Internet and advances in computing technology have made it much easier and cheaper to process and package new loans.