Two stories today demonstrate that the housing market downturn may continue for sometime.
First, the Washington Post reports that one of the nation’s largest subprime lenders is having trouble paying creditors:
New Century Financial, once a highflying lender of risky mortgages, said yesterday that it does not have the money to pay its lenders, fueling speculation that it might not survive much longer.
The New York Stock Exchange halted trading of New Century’s shares, which had dropped to $1.66 from $3.21 Friday.
The California company said in a filing with the Securities and Exchange Commission yesterday that all of its lenders have either pulled its funding or have said they will do so. “They need to come up with an alternative source of funding or else they are going to file for bankruptcy,” said Matthew Howlett, an industry analyst at investment bank Fox-Pitt Kelton.
The unraveling of New Century is one of the highest-profile setbacks to the subprime mortgage market, which caters to people with blemished credit histories or insufficient cash for a down payment. In recent years, when housing prices were rising, millions of people used such mortgages to buy homes they otherwise could not afford. Once home prices leveled off, borrowers started to default on their mortgages. That wreaked havoc on the subprime sector, which accounted for about a fifth of all new mortgages last year.
Concerns about the future of the risky loans have already rattled stock markets. The fear is that problems with subprime borrowers will spill over into the broader mortgage market, damage the economy and dampen demand for homes.
And then, the New York Times reports that more homeowners are falling behind on their mortgage payments
The percentage of home owners who were unable to make their mortgage payments increased noticeably in the fourth quarter and shot up significantly among people with weak, or subprime, credit, according to an industry report released today.
The Mortgage Bankers Association reported that 4.95 percent of all homes were past due in the last three months of the year, up from 4.67 percent in the third quarter and 4.7 percent in the fourth quarter of 2005.
But the number of loans past due in the troubled subprime market, which caters largely to poor and minority borrowers, rose to 13.33 percent, up from 12.56 percent in the third quarter. The serious delinquency rate, which includes loans that are in foreclosure and 90 or more days past due jumped to 7.78 percent, from 6.78 percent.
Default rates are at their highest since 2002 and early 2003, when the economy was much weaker than it is today and unemployment was hovering close to 6 percent. By comparison, the unemployment rate at the end of last year was 4.5 percent and incomes were growing at a pace faster than inflation for the first time in several years.
A collapse in the subprime market would have implications for the real estate market as a whole. Foreclosures would put alot of cheap housing on the market, reducing the price that homeowners could get for their own homes and making it harder to sell homes to begin with. Much of this, of course, relates back to questionable lending practices during the real estate boom whem people who otherwise couldn’t afford them were able to purchase homes worth $ 500,000 thanks to creative financing. Now that the market has collapsed, they are finding it harder to make their payments.
It may be some time before this plays itself out.
