Scrutiny grows on US subprime lenders
By: Richard Beales in New York and Sarah Spikes in London
March 5, 2007 - The Financial Times
Recent aggressive lending to American home buyers with weak credit histories is attracting mounting official scrutiny with at least two US lenders now facing federal probes or restrictions on their operations.
A group of US financial regulators is also proposing new guidelines that would clamp down on subprime mortgage lending practices amid concerns that stretched borrowers have not fully understood the risks involved.
Many lenders have already tightened their criteria following a sharp rise in payment problems with subprime and slightly less risky “alt-A” mortgages that has triggered a sell-off that some worry could spread more widely in the $8,000bn mortgage market and beyond.
HSBC, owner of US-based subprime lender Household, last month issued its first profit warning on the back of US bad debts being $1.76bn higher than expected.
The world's third-biggest bank is on Monday expected to report bad debt provisions of more than $10.6bn for 2006 – up more than 35 per cent from 2005.
Bobby Mehta, chief executive of HSBC's North American operations, and Sandy Derickson, head of the bank's US retail unit, were both ousted last month after the bank warned on the US loan losses.
Lenders loosened underwriting standards in recent years to maintain origination volumes in a slowing housing market. But the poor quality of loans made in 2005 and 2006 is now coming home to roost, forcing nearly 30 subprime lenders to close their doors in recent months.
New Century Financial, a big subprime lender, said late on Friday that the US attorney for the central district of California was investigating trading in its securities and its accounting practices.
New Century has also received information requests from the Securities and Exchange Commission and the New York Stock Exchange watchdog.
The company said it would report a loss for 2006 and that its auditors could raise questions over its viability if it failed to negotiate waivers from some of its creditors.
Fremont General, a smaller subprime lender, said it would agree with the Federal Deposit Insurance Corporation to stop making risky mortgage loans and end other violations, adding that it planned to exit the business.
In proposing new guidelines for subprime lending on Friday, five regulators including the Federal Reserve and the FDIC highlighted concerns over adjustable-rate mortgages in which lenders gave risky borrowers low “teaser” interest rates that reset at much higher levels later.
They said borrowers might not understand these loans and added they could pose “an elevated credit risk to financial institutions”.
Subprime mortgages constituted about 23 per cent of home loans made last year in the US, with more than half of them adjustable-rate products.
The regulators said lenders should assess borrowers' ability to repay home loans at the full interest rate, not the introductory rate. They also said lenders should provide consumers with clear and balanced information about the benefits and risks of the products.
Copyright The Financial Times Limited 2007 |
