Lawrence Yun, senior economist for the National Association of Realtors, predicts home sales will turn around in early 2008. She states this is due to more favorable conditions in the current mortgage market.
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Moody’s Investors Service described some so-called Alt A mortgages as no better than subprime home loans, and said it will change how it rates related securities after failing to predict how far delinquencies would rise.
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As the problems with bad credit mortgages continue to work through the system, GreenPoint Mortgage, a subsidiary of Capital One Financial has announced it is closing 12 of its operational centers.
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SunTrust Banks Inc., the 7th-largest U.S. bank by assets, said its first-quarter profit fell 1.9 percent as problem home loans increased and its overall mortgage lending slowed.
Turmoil in the mortgage market is ensnaring more companies who lend to people with decent credit.
The newfound spread of home loan lending woes beyond loans to those with weak credit scores threatens to reduce the availability of home loans for some consumers and even threaten the existence of some lenders.
The mortgage company American Home Mortgage Investment Corp. cut its first-quarter and full-year profit forecast by more than 25% Friday after being hit by problems in the secondary market for home loans and mortgage-backed securities.
The company also said that it’s stopped offering some types of so-called Alt-A mortgages because of the high cost of delinquencies on those loans. The warning suggests that problems in the subprime-mortgage business have begun spreading to other parts of the home-loan industry.
American Home said that first-quarter earnings will be roughly 40 cents to 60 cents a share, down from its previous view of $1.11 to $1.17 a share. For 2007, it forecast earnings of $3.75 to $4.25 a share, compared with the $5.40 to $5.70 a share it previously predicted.
“During March, conditions in the secondary-mortgage and mortgage-securities markets changed sharply,” said Michael Strauss, American Home’s chief executive, in a statement. “While the market may recover … our working assumption must be that current market conditions will persist.”
American Home also indicated that it continues to be affected by the high cost of delinquencies, especially on Alt-A mortgages, and that it’s been forced to repurchase some of these loans.
The company announced that it’s stopped offering certain types of Alt-A home loans that have been particularly prone to rising delinquencies and repurchases. Those are loans where the homeowner borrows a relatively high portion of the value of a property and simply states an income, rather than documenting it.
American Home also said that it plans to raise the interest rates charged on home mortgages.
Subprime-mortgage originators such as New Century Financial, NovaStar Financial Inc. and Accredited Home Lenders Holding Co. have been hit hard this year by rising delinquencies and foreclosures. Subprime loans are offered to poorer borrowers with blemished credit records, so many experts expected trouble in this corner of the mortgage market once house prices stopped rising quickly.
But American Home isn’t a subprime lender.
In early March, the company issued a statement to clear up any “confusion” about the type of loans it offers. Most are adjustable-rate mortgages and so-called Alt-A loans, which often require less documentation. American Home even offers conventional fixed-rate home loans. Subprime mortgage are less than 1% of its total loan portfolio.
Still, American Home said Friday that earnings will be lower because investors in the secondary-mortgage market and the market for mortgage-backed securities (or MBS) offered to buy its loans at “materially lower” prices.
Lower prices for AA-, A-, BBB-rated MBS and riskier bits known as residual-mortgage securities also triggered losses in American Home’s investment portfolio, the lender added.
Alistair Barr is a reporter for MarketWatch in San Francisco.
Grim as the bad credit mortgage crisis already is, it’s soon likely to spread to a slightly higher tier of home loans known as Alt-A mortgage loans.
That’s according to the warnings of a respected economist affiliated with the University of California at Los Angeles.
“The question is to what extent,” David Shulman, a senior economist with the UCLA Anderson Forecast in Los Angeles, said. “That could be the next shoe to drop. Certainly, it’s a very reasonable concern.”
California is home to half of the 20 biggest U.S. bad credit mortgage lenders, such as New Century, which filed for bankruptcy protection yesterday and has spawned a wave of concerns in financial markets.
The deteriorating subprime mortgage industry sparked a probe by the California Attorney General, Jerry Brown, and Congress is considering regulations to tighten lending standards for such mortgages.
Subprime home loans, a term applied to some of the riskiest home financing mortgage products, are typically made to those borrowers with poor credit or extremely high debt burdens.
By contrast, Alt-A loans made to people who are considered good credit risks, but who may lack documents needed to qualify for conventional loans.
Therefore, an Alt-A mortgage provider is most likely to provide no doc loans to a borrower with good credit but who cannot or does not wish to provide items such as income verification.
UCLA Anderson Forecast lowered its prediction for housing starts this year to 1.33 million units from a previous estimate of 1.48 million units. In all, constructors broke ground on new homes at a 1.53 million clip in the month of February.
Lawmakers have criticized the Federal Reserve and other bank regulators in recent weeks for allowing too many borrowers to get mortgages they couldn’t afford to repay.
Tom Marano, head of the mortgage business at Bear Stearns Cos. in New York, said on March 29 that he doesn’t see a significant risk of the subprime lending problem spreading to other parts of the mortgage market.
Shulman disagreed.
“We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,” he wrote as part of the UCLA Anderson Forecast is affiliated with the University of California at Los Angeles and is located at the UCLA Anderson School of Management.
SOURCE: Bloomberg News
Subprime (bad credit mortgage) loans have certainly been generating a lot of attention, and worry, among investors, economists and regulators, but those loans may be only part of the threat posed to the housing market by risky lending.
Some experts in the field are now concerned about the so-called Alt-A mortgage loan market, which has grown even faster than the market for subprime mortgage loans to borrowers with less than top credit.
Alt-A refers to people with better credit scores (A-credit) who borrow with little or no verification of income - so-called alternative documentation.
But some people in the industry call them “stated income” loans, or worse, “liar loans.” And these almost no-doc loans were an important part of the record real estate boom of 2004 and 2005 that has recently shown signs of turning into a bust.
Standard & Poor’s estimates that the Alt-A market has gone from less than $20 billion in home loans in the fourth quarter of 2003 to more than $100 billion in each of the last three quarters.
Overall, new Alt-A mortgage transactions totaled $386 billion in 2006, according S&P’s estimates - up a drastic 28 percent from 2005.
By comparison, bad credit home loans reached a whopping $640 billion in 2006, according to trade publication Inside Mortgage Finance.
But just as the Alt-A market share has grown even faster than the bad credit home loan market, some believe it could shrink even faster amid some of the concerns in the marketplace right now.
That means another pool of money that has supported home sales and housing prices being yanked just as home sales and prices are already in decline.
The loans were very popular among home buyers who were in the market for a real estate investment property, rather than a home that they intended to live in.
And while the default and deliquency rates for Alt-A are only a fraction of the rates for subprime, the widespread use of the loan by investor buyers is a concern, given the glut of homes bought by those investors which are now sitting on the market without buyers.
“There’s a reason they ask on the mortgage application do you intend to live in the property,” said David Berson, chief economist for mortgage financing firm Fannie Mae. “People who live in a property are less likely to default than investors.”
Still, Berson said that default rates are likely to rise for many Alt-A loans, he doesn’t think it will reach the levels seen in the subprime sector.
He said only 1.5 percent of Alt-A loans are now 60 days delinquent or more, while in subprime / bad credit mortgages it is 7.5 percent.
Absent a major recession, he doubts that Alt-A loans will reach the same kind of deliquency or default rates causing worries and mortgage lender bankruptcies in subprime.
But many in the field say that there is a real squeeze on Alt-A loans as lenders tighten up on underwriting standards. Mitch Ohlbaum, president of mortgage broker Legend Mortgage whose business was about 55 percent Alt-A, said he’s seen a dramatic change in the business the last few years.
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Default. It’s not just for bad credit mortgages anymore.
Rising delinquencies on U.S. home loans are hitting higher-quality home mortgages for the first time, Standard & Poor’s said Thursday, as it put some of the bonds backed by the largest U.S. home mortgage company’s loans on review.
The rating company said that it placed a Countrywide Financial mortgage-backed bond issue under review for downgrade.
It was the only so-called “Alt-A” (or bad credit mortgage) loan from 2006 to be placed on such a review based on poor performance of underlying loans.
S&P on Wednesday also put 10 subprime issues on CreditWatch negative.
Representing one of the fastest growing segments of the $10 trillion U.S. home mortgage market, Alt-A mortgage loans are typically issued to borrowers with better credit than subprime, but still short of the most stringent requirements, such as proof of income.
A FICO credit score below 620 in a range from 350 to 850 usually puts borrowers in the subprime category.
A spokeswoman for Calabasas, Calif.-based Countrywide, the biggest U.S. mortgage lender, declined immediate comment.
The reviews follow others in the subprime lending sector where the most risky home buyers have run into severe credit problems in the aftermath of the housing market boom.
Before Wednesday’s announcement, there were at least seven subprime issues already flirting with downgrades based on the rapid increase in home loan delinquencies, including some in the first month of the loan’s life.
The top driver of delinquencies were second-lien “piggyback loans” taken by borrowers that are often used as a down payment.
The Countrywide mortgage loans backed its Asset-Backed Certificates Trust 2006-IM1 mortgage bond issue, S&P reported. The other deals placed on CreditWatch were sold by units of companies including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., and New Century Financial Corp.
SOURCE: Reuters