The End Of Easy Money?
forbes.com
WASHINGTON, D.C. - A lender of nontraditional mortgage loans will tighten its lending standards in response to "supervisory guidance" issued by a band of five government regulating agencies, led by the Comptroller of the Currency, signaling darker days ahead for the sub-prime credit market.
New Century Financial (nyse: NEW - news - people )--an Irvine, Calif., sub-prime mortgage lender, said Thursday that "in light of recent regulatory guidance and the changing interest rate and housing environment," it will tighten underwriting standards; enhance "its process for confirming the income information on stated income loans"; and improve its disclosures to consumers. Almost 90% of the company's loans fall in the sub-prime category, while 17% of its loans are interest-only and 42% are so-called stated income (also known as a "liar loan" because it doesn't require pay stubs, W2s, tax returns or other Internal Revenue Service forms).
As Forbes.com suggested in August (see " Dodging a Bullet"), the Washington tea leaves haven't look so good for mortgage lenders. Besides softening home prices in once-hot markets such as Washington, Miami and Las Vegas, the regulators have poured cold water on the popular but deadly interest-only and pay-option adjustable-rate (option-ARM) loans--in which borrowers decide each month how much to repay--because of low documentation and other underwriting criteria perceived as too risky by regulators and even some industry participants.
Now, many more lenders will follow New Century's moves--just don't expect to see the issuance of many press releases about the changes, notes Andy Laperriere, analyst at ISI Group in Washington. After all, adapting to the government's new rules will reduce demand for mortgage credit and hurt bank profits.
Laperriere points out that 79% of First Federal Bancshares' (nasdaq: FFBI - news - people ) loans in the first half of the year were stated-income loans, according to its latest 10-Q. Almost one-fifth of Washington Mutual's (nyse: WM - news - people ) loans during the same period were option-ARMs. And at Countrywide Financial (nyse: CFC - news - people ), 42% of its giant mortgage portfolio consists of option-ARMs.
It's likely these companies will need to explain such risky loans more carefully, require higher down payments and better scrutinize borrowers' income. Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a July letter to regulators that interest-only and pay-option mortgage products now account for 26% of loan originations, "a sharp increase from last year." |
