Tuesday, February 13, 2007

Subprime lenders worried by high default rates

Last week some serious problems in the subprime mortgage business became evident, as a number of lenders announced higher-than-expected losses. HSBC officials said the company’s US division reported rising defaults, and New Century declared its financial results for 2006 contained accounting errors and overestimated the company’s earnings. Shares of subprime lenders saw serious declines throughout the week, exacerbating the situation for mortgage companies.

The subprime sector has been especially productive recently, with lenders looking to close as many loans as possible and allowing for lower mortgage quality. As delinquency rates begin to rise, they’re likely to start tightening their standards and raising interest rates on high-risk loans. This means that many borrowers will be unable to access credit, which may lower housing sales.

An estimated 17% of home purchases are now made using subprime loans. If these consumers are left out of the housing market, the effect will certainly be felt throughout the industry, but it’s hard to quantify the impact. The overall delinquency rate was 4.7% in 2006, up from the historic low of 4.4% in 2005. Probably not all subprime borrowers will leave the market, and economists say the reduction shouldn’t be a big problem for the industry.

Experts are optimistic in their forecasts and believe that the economy will remain stable throughout 2007, and the housing market will start to improve later in the year. Freddie Mac forecasters say the economy won’t be dragged down by the slumping Real Estate industry.

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