The Mortgage Manifesto!

Subprime turmoil ensaring companies that lend to people with good credit

April 2007

Associated Press

MSNBC

NEW YORK - Turmoil in the mortgage market is ensnaring more companies who lend to people with decent credit.

The spread of home lending woes beyond loans to those with weak credit threatens to reduce the availability of loans for some consumers and even threaten the existence of some lenders.

Rising delinquencies and defaults among subprime borrowers — those with blemished credit histories — have resulted in more than two dozen lenders going out of business, moving into bankruptcy protection or putting themselves up for sale.

Now the so-called Alternative-A mortgage sector, which loans to borrowers with better credit than subprime borrowers but not quite prime, is starting to hurt.

One Alt-A lender, American Home Mortgage Investment Corp. of Melville, N.Y., announced late last week that it was having trouble selling its mortgages into the secondary market and would have to cut its earnings forecast for the quarter and the year. At least five analysts downgraded the stock on Monday, and its shares fell more than 15 percent on the New York Stock Exchange. The shares dropped $2.37, or 11 percent, on Tuesday to close at $19.55.

Subprime blame game…Continued

Regulators

The charge: Government agencies such as The Federal Reserve did not use the authority granted them under the Home Ownership and Equity Protection Act to prohibit substandard lending practices.

Federal regulators came in for a large share of subprime blame during a series of Congressional hearings in March. Christopher Dodd, Democrat from

Connecticut

and, perhaps not coincidentally, presidential candidate, accused regulators of being "asleep at the switch" when they allowed lenders to push hybrid loans with low initial rates that would spike in future years.

Harry Dinham, president of the National Association of Mortgage Brokers, says, "The majority of these loans were being done by companies like New Century and Countrywide were not under the control of bank regulators."

Furthermore, there's nothing inherently wrong with the loan products themselves, according to Dinham. "They were designed to give the credit-challenged a chance," he says. "To see if they could make it."

Regulators were following a policy that they hoped would help increase home ownership, a goal regularly lauded by politicians.

Bottom line: Regulators could probably have acted sooner to stem the worst abuses.

Subprime blame game…

New estimates and projections are released… some 2.4 million homeowners are in danger of losing their homes. Critics are pointing their fingers at who is responsible - here are the main targets.

Mortgage brokers

The charge: Brokers steered borrowers to loans they couldn't afford.

The huge increase in mortgage originations, including a spike in refinancings, during the first half of the 2000s, attracted a flood of new mortgage brokers into the industry. Despite a lack of experience, many were soon earning six-figure incomes.

When business slowed near the end of 2005, brokers had to find new ways to churn out deals. "Clients started to get harder to come by and the brokers started shaking the trees a little harder," says Allen Hardester, director of business development for mortgage broker Guaranteed Rate. Some very poor risks who would have been blown off during better times, got loans.

Years of out-sized home price increases delayed the day of reckoning but when markets stopped their run-up in 2006, it left many borrowers unable to make payments. And the more recent the loan, the more tenuous is seems to be.

"Subprime 2006 loan originations are going delinquent much more quickly," said Bob Visini, vice president of marketing for First American Loan Performance. But mortgage brokers have come in for an unfair amount of criticism, according to Harry Dinham, president of the National Association of Mortgage Brokers .

"It's the lender's money," he says. "They're reviewing the loans. They put loan programs out there and it's the mortgage broker's job to sell the programs."

Bottom line: Were mortgage brokers always careful about matching borrowers with affordable mortgages? No way. But lenders made the ultimate underwriting decision.