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U.S. mortgage carnage bad, could be worse |
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NEW YORK - Problems at companies that make loans to Americans with poor credit histories might be even worse if Wall Street did not like those loans so much. This week, HSBC Holdings, one of the world's biggest banks, said it will set aside $1.76 billion (900 million pounds) more for bad debts than expected, largely for problems in U.S. "subprime" loans. And New Century Financial, a big California subprime lender, forecast a surprise fourth-quarter loss and said it will reduce profit in the prior three quarters because defaults are rising. Its stock sank 36 percent Thursday. HSBC and New Century are two of the three biggest U.S. subprime lenders. Analysts expect more carnage among smaller, often weaker rivals. "It will be a tough year," said Stuart Plesser, an analyst at Standard & Poor's. "In their drive to pick up market share, too many lenders mispriced loans. Their options were to join the crowd, or do less business. You see the aftermath now." Yet analysts also say the appetite of investors for securities into which mortgages and other consumers are packaged remains strong. The subprime industry might be due for a consolidation, but not an evisceration. "The market will see a huge surge of defaults," said Guy Cecala, president of Insider Mortgage Finance Publications. "What would kill the subprime market tomorrow is if there were no demand for securitized subprime loans. That's not likely. The real risk is to pure players like New Century." HISTORY In the 1980s, subprime lending was concentrated among larger companies such as Household International, now HSBC Finance, and The Money Store, now folded. They would make loans and hold them on their books. In the following decade, investors seeking safe, predictable income streams led to growth in packaging loans into securities. Subprime loans were appealing because borrowers were not likely to have the financial ability to prepay. This ensured steady flows of interest income. The 1998 Russian debt crisis ended the party, as investors flew to safer securities such as U.S. Treasuries. This decade's housing boom attracted new lenders and low interest rates fuelled demand for higher-yielding mortgage securities. As home prices rose, lenders eased standards. No-money-down loans became more common. Adjustable-rate mortgages (ARMs) with low initial rates and loans that let borrowers pay less than interest due each month, became more popular. Debt soared. Many borrowers will pay the piper. The Mortgage Bankers Association expects up to $800 billion of ARMs to reset in 2007. Among people who owe money on their homes, one in four have ARMs, and one in 11 have subprime ARMs, the group said. LENDERS REACT Analysts say people will fight not to lose their homes. "Historically, people don't walk away from their homes unless they lose their jobs, or have medical expenses or family issues, because their home is their biggest asset," said Kathy Shanley, a senior bond analyst at Gimme Credit in Chicago . Yet lenders cannot count on borrower perseverance to make money. Many, such as Washington Mutual Inc and New Century, have tightened their lending standards. Others have thrown in the towel in the last six months. "There's probably 40 or 50 a day throughout the country going down in one form or another," Mozilo said. "I expect that to continue throughout the year." http://uk.biz.yahoo.com |
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