From MSN Money 2/15/07
Shake-up coming in high-risk loans
The Wall Street Journal reported today that big banks such as Merrill Lynch (MER, news, msgs), JPMorgan Chase (JPM, news, msgs) and HSBC (HBC, news, msgs) are unloading bad loans like hot cakes as more Americans fall behind on mortgage payments.
The banking giants, which had gone on loan-buying sprees in 2005 and 2006, are trying to force mortgage originators to buy back subprime loans, the newspaper said. As defaults have increased over the past few months due to rising interest rates and slowing home appreciation, Merrill Lynch and other big financial institutions have exercised their contractual rights to demand that sellers to take back the bad loans, the paper continued. The contracts force mortgage originators to repurchase loans that default early in their term or that come with mistakes, such as flawed property appraisals.
Last week, HSBC surprised analysts with news that its charge for bad debts would be more than $10.5 billion for 2006 — 20% higher than it had expected. CEO Michael Geoghegan said he was taking action to change its lending policies.
Will subprime lenders stay afloat?
The surge in defaults is causing concern about whether lenders such as New Century Financial (NEW, news, msgs) and NovaStar Financial (NFI, news, msgs) will be able to manage losses. On the same day that HSBC made its announcement, New Century Financial warned about a fourth-quarter loss because of a rise in defaults.
Still, New Century shares were down 4.9% on the day; NovaStar Financial was off 3.8%. New Century is down nearly 41% on the year. NovaStar is down nearly 37%.
One mortgage broker told Market Dispatches that part of the problem was due to the disparity between household income and home value during the housing boom. “The days of paying off mortgages as our parents used to are seemingly out the door,” said Jim Goodwin, a mortgage broker at San Diego’s MD Mortgage Group. “The mentality has changed. Homeowners are too concerned about keeping up with the Joneses rather than building equity in their home and increasing their savings.”
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My comments – New Century was one of the original Shawn Tieskotter lenders. The common stock got hammered last week. I expect to see this get much worse. It’s going to be ugly.
[...] I reported 2/15/07 (3 weeks ago) the common stock of New Century got hammered on wall street. I wrote: New Century was one of the original Shawn Tieskotter lenders. The common stock got hammered last week. I expect to see this get much worse. It’s going to be ugly. [...]