Tuesday, March 13, 2007
Boom hits basement
1.5 million in U.S. could lose homes
By Bob Ivry BLOOMBERG NEWS
If this slump follows the same pattern as the last one, in 1991, it will persist for at least another year and may fuel a recession.
A truck is reflected in an office window at New Century Mortgage Corp. in Foxboro. New Century Financial Corp.'s stock, already down about 90 percent this year, fell to its lowest level since 1998.
(BLOOMBERG NEWS)
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Hold on to your assets. The deepest housing decline in 16 years is about to get worse.
As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to Realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.
The spring buying season, when more than half of all U.S. home sales are made, has been so disappointing that the National Association of Home Builders in Washington now expects purchases to fall for the sixth consecutive quarter after it predicted a gain just last month.
“The correction will last another year,” said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pa. “Fewer people qualifying for mortgages means there will be less borrowers, and that will weigh on demand.”
A five-year housing boom that ended in 2006 expanded home-ownership to a record number of U.S. households. Now it has given way to mounting defaults, failing subprime mortgage companies and an increasing number of unsold homes.
If this slump follows the same pattern as the last one, in 1991, it will persist for at least another year and may fuel a recession. New-home sales declined 45 percent from July 1989 to January 1991, and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession, said Robert Kleinhenz, deputy chief economist of the California Association of Realtors.
This time around, new-home sales have declined 28 percent since September 2005, hitting a low in January, the last month for which data is available. And though the national jobless rate is near a five-year low this month, mortgage-related jobs fell by almost 2,000 in January alone. At least two dozen of the more than 8,000 mortgage lenders have been forced to close or sell operations since the start of 2006.
Subprime lenders Ameriquest Mortgage Co. in Irvine, Calif.; Ownit Mortgage Solutions LLC and WMC Mortgage Corp., a subsidiary of General Electric Co., in Woodland Hills, Calif.; Mortgage Lenders Network USA Inc. in Middletown, Conn., and Fremont General Corp. together have fired more than 5,600 workers in the past year.
New Century Financial Corp., the second-largest subprime lender, said yesterday it ran out of cash to pay back creditors who are demanding their money now. The Irvine, Calif.-based company has lost 90 percent of its market value this year and stopped making new subprime loans, prompting speculation it will seek bankruptcy protection. New Century already has cut 300 jobs and its 7,000 remaining employees are waiting to see if the company will survive.
Fremont General, the Brea, Calif.-based lender that is trying to sell its residential-mortgage unit, was ordered to stop making subprime loans by the U.S. Federal Deposit Insurance Corp. last week.
Fremont was marketing and extending loans “in a way that substantially increased the likelihood of borrower default or other loss to the bank,” the FDIC said last week.
Doug Duncan, chief economist of the Washington-based Mortgage Bankers Association, predicted in January that more than 100 home lenders may fail this year.
The subprime crisis “has taken the fuel out of the real estate market,” said Edward Leamer, director of the UCLA Anderson Forecast in Los Angeles. “The market needs new money in order to appreciate, and all of that money is gone for a very long time. The regulators are not going to allow it to happen again.”
Subprime mortgages are given to people who wouldn’t qualify for standard home loans and typically have rates at least 2 or 3 percentage points above safer prime loans.
The portion of subprime loans that financed new mortgages rose to 20 percent last year from 5 percent in 2001, according to the Mortgage Bankers Association.
Subprime loans contributed to a home-ownership rate that reached a record 69.3 percent of U.S. households in the second quarter of 2004, up 5.4 percentage points from the same period in 1991, according to the U.S. Census Bureau.
“Probably the gain in home ownership over the last four, five years, is almost entirely due to looser lending standards,” said James Fielding, a homebuilding credit analyst at Standard & Poor’s in New York.
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