U.S. Subprime Mortgage Delinquencies at 4-Year High (Update3)
By Sharon L. Crenson and Kathleen M. Howley
March 13 (Bloomberg) -- U.S. subprime borrowers fell behind on their mortgages at the highest rate in four years in the fourth quarter and foreclosures begun on all types of home loans rose to an all-time high, the Mortgage Bankers Association said.
The share of subprime borrowers making late payments rose to 13.33 percent from 12.56 percent in the third quarter, the Washington-based group said in a report today. Foreclosures also rose on loans to borrowers with the best credit ratings, a sign of broader trouble in the mortgage market.
Lenders loosened credit standards on prime loans with the lowest interest rates last year as they competed for a shrinking pool of borrowers. Widespread defaults in the $6 trillion mortgage-backed securities market could push the U.S. economy into recession, said economist Gary Shilling.
``The worst is really yet to come,'' said Shilling, president of A. Gary Shilling & Co. Inc., a Springfield, New Jersey-based economic forecasting company. ``To keep the game going last year lenders simply lowered their credit standards. As a result, you've had a tremendous number of these mortgages that have gone bad.''
Overdue payments on all types of loans rose to 4.95 percent from 4.67 percent in 2006's third quarter. That was the highest since the second quarter of 2003.
Early Indicator
The delinquency rates are an early indicator of mortgage defaults in a housing market already beset by falling prices and too much inventory. In January, there were 4.09 million new and previously owned homes for sale, up from 3.41 million a year earlier, according to data from the National Association of Realtors and the Commerce Department.
Sales of new houses probably will tumble 10 percent to 950,000 this year, on top of a 17 percent drop in 2006, the Chicago-based National Association of Realtors said in a forecast today. Sales of previously owned homes will drop 0.9 percent, following an 8.5 percent drop last year, the group said.
In the quarter, 2.57 percent of prime barrowers were at least 30 days late in their mortgage payments, a fifth the rate of subprime borrowers, according to the Mortgage Bankers report. The percentage of homes in foreclosure also rose for both categories, with foreclosures on prime loans climbing 6 basis points to 0.5 percent and on subprime loans 18 basis points to 4.53 percent. A basis point is one one-hundredth of a percent.
As home prices rose to records and loan applications declined, lenders lowered their standards for all borrowers, said Doug Duncan, chief economist for the bankers' group, on a conference call today.
``If you go back and look at the loans originated in any year which is the peak in a cycle, you'll find that those loans tend to perform the least well,'' Duncan said.
New Century Financial
The Mortgage Bankers report is based on a survey of 43.5 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.
The data comes after New Century Financial Corp. said it is the subject of a U.S. Securities and Exchange Commission investigation, leading to a suspension of trading. The second- biggest U.S. subprime mortgage lender yesterday said it doesn't have the cash to pay creditors, including Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc.
Accredited Home Lenders Holding Co. shares lost half their value after lenders stepped up demands for cash. Accredited needs to raise money after paying more than $190 million demanded by its backers and is ``exploring various strategic options,'' according to a statement today. The San Diego-based company, the 15th- biggest U.S. subprime mortgage company, also plans unspecified job cuts.
Rising for Year
Delinquency rates have been rising for a year led by those among subprime borrowers, who obtained loans with higher interest because they had little or no down payment or flawed credit, have been rising for a year, Jay Brinkman, the Mortgage Bankers' vice president for research and economics said in an interview before the data was released.
Fourth-quarter delinquencies are traditionally higher than the rest of the year as homeowners face the first home-heating bills of the winter at the same time they are spending money on Christmas presents, he said. The data distributed today showed increase in delinquencies among all borrowers even on a seasonally adjusted basis.
``The delinquencies and defaults have started to soar,'' said Nicolas Retsinas, director of Housing Studies at Harvard University in Cambridge, Massachusetts. ``A lot of these lenders started to make loans and lost track of some of the fundamentals.''
No Money Down
More than two dozen subprime lenders have been forced to close or sell operations as defaults on those mortgages have risen to a seven-year high, according to data compiled by Friedman Billings Ramsey Group Inc. of Arlington, Virginia.
Subprime loans are often made to borrowers who make little or no down payment, at rates at least 2 or 3 percentage points above prime loans. In some cases, borrowers weren't even required to provide proof of income and may have high levels of debt. Such loans made up about a fifth of all new mortgages last year, according to MBA data.
More than 5,600 workers have lost their jobs at Ameriquest Mortgage Co. in Irvine, California; Ownit Mortgage Solutions LLC and General Electric Co.'s WMC Mortgage Corp. in Woodland Hills, California; Mortgage Lenders Network USA Inc. in Middletown, Connecticut; and Fremont General Corp in Brea, California.
Countrywide Financial Corp., the biggest U.S. mortgage lender, said yesterday that late payments on home loans it manages were virtually unchanged last month. Loans at least 30 days past due remained at 4.71 percent of total loans serviced, the same as in January, the Calabasas, California-based company said. A year earlier, 4.29 percent of those loans were late.
``We see no evidence of significant rises in defaults in the regular loan market,'' said Joe Gyourko, a real estate and finance professor at the Wharton School at the University of Pennsylvania in Philadelphia.
To contact the reporters on this story: Sharon L. Crenson in New York at screnson@bloomberg.net ; Kathleen M. Howley in Boston at kmhowley@bloomberg.net .
New York Stock Exchange. 
Just two weeks after China sent global markets into a tumble, growing worries about sub-prime mortgage lenders in the United States are sending jitters through stock exchanges around the globe. The three major US stock market indices each fell two percent from Monday's closing price, marking the second-biggest loss of 2007. London's FTSE 100, Paris' CAC 40 and Frankfurt's DAX 30 indices each closed down more than 1 percent.

As the Mortgage Bankers Association reported that late payments on mortgages and home foreclosures in the US homes rose in the fourth quarter to their highest level in years, investors are concerned that not only US banks but also multi-national banks around the globe could have exposure.

More than two dozen sub-prime lenders have closed or sold operations as defaults on those mortgages have risen. "The delinquencies and defaults have started to soar," said Nicolas Retsinas, director of Housing Studies at Harvard University. "A lot of these lenders started to make loans and lost track of some of the fundamentals." 

New Century Financial Corporation, the second largest sub-prime lender in the US, has recently revealed that its creditors were no longer providing funds and, further, it has become subject of an SEC investigation. The New York Stock Exchange has said it will delist New Century. Accredited Home Loan Lending, another major sub-prime mortgage specialist, said it was seeking fresh capital and waivers on its lending covenants.

Sub-prime lenders provide mortgages to people who do not qualify for loans from mainstream lenders, typically due to their credit histories. The lenders then bundle these mortgages as collateral for loans that they obtain from other financing firms, such as GMAC. Such firms can then repackage these loans and sell them as mortgage-backed securities. These securities may end up in the hands of major multi-national banks such as Citibank, HSBC, and Commerzbank. Each level of lending assumes a level of financial risk, but trouble can arise when the risk tolerances are exceeded. If too many homeowners default on their mortgages, the sub-prime lender can end up defaulting. If too many of these lenders default, as it is feared may be happening now, the defaults can cascade upward. While no one is predicting major bank failures at this point, it is feared that their profits could be hurt.