| In the past few weeks, the bodies have been piling up fast and furiously. Fallout from [tag]subprime mortgages[/tag] – that is, home loans to borrowers with a blemished credit history – gone bad has wreaked havoc on the industry. Big names Washington Mutual (Charts) and HSBC have reported hits tied to their subprime business and there has been a nonstop barrage of bad news for [tag]major subprime lender[/tag]s, including New Century Financial (Charts) and NovaStar Financial (Charts). Now the worry is what happens to the economy if enough homeowners go into default and to the financial markets if enough investors take a bath on mortgage-related securities. |  |
As for foreclosures, they’re currently running 25 percent higher than they were this time last year, according to RealtyTrac. “We don’t have high unemployment, high interest rates or a slowing economy, but we’re seeing the number of foreclosure filings pushed above historic averages,” says Rick Sharga, a marketing exec for RealtyTrac. “You can’t underestimate the effect of higher risk loans.” Adding to the problem are jittery lenders who have suddenly begun to tighten their standards. “You’re seeing credit score requirements being increased. You’re seeing documentation firming up,” says Bob Walters, chief economist with Quicken Loans. “Fewer people will get loans and maybe rightly so.” The higher hurdles, while perhaps healthy for the long term, will cause a short- term credit crunch. Translation: delinquencies and foreclosures should rise, which will create more credit problems in a vicious cycle that will probably weigh on housing for the rest of the year. None of this is good news to investors in U.S. residential mortgage-backed securities, which now account for some 20 percent of the global fixed income market, the largest component. (more…)
