- The Washington Times - Thursday, February 8, 2007

NEW YORK (AP) — The mortgage industry plunged deeper into distress this week as two lenders said sagging home prices and higher interest rates are pushing many borrowers into delinquency.

HSBC Holdings PLC, Europe’s biggest bank and a major player in the U.S. mortgage industry, said the market for “subprime” mortgages, or home loans to people with blemished or limited credit histories, is in trouble.

Analysts’ estimate for how much HSBC needs to sock away for problem loans is shy by a fifth, HSBC said. The London bank estimates it should set aside almost $10.6 billion to cover loans it won’t be able to collect.

Shares of mortgage providers fell across the board yesterday, but none was hit as hard as New Century Financial Corp., a subprime mortgage lender in Irvine, Calif. The company said late Wednesday that accounting errors caused it to lose track of how drastically some of its mortgage loans are losing value.

Three Wall Street analysts downgraded New Century, and its shares fell $10.92, or 36 percent, to $19.24 in New York Stock Exchange composite trading, the biggest decline since October 1998.

During the housing boom, many mortgage banks devised loans allowing people to borrow money with no down payment and pay low interest rates for the first few years on adjustable mortgages. Now, as interest rates reset higher, more borrowers are missing payments and many lenders are going out of business or putting themselves up for sale.

Subprime loans were once very attractive to some banks because of their higher interest rates.

But HSBC said the weak housing market exacerbates credit problems in the subprime mortgage market. Until a little more than a year ago, stretched borrowers who needed to raise cash could take out a second mortgage on their houses and use that money to pay off loans. With housing prices stagnant — and in some markets falling — consumers’ best source of financing has shriveled.

The problem for these types of lenders may not go away quickly.

“We expect poor subprime credit trends to continue at least through 2007 and into 2008,” Merrill Lynch analyst Kenneth Bruce wrote in a research report.

Another reason bad credit besets mortgage lenders is it shrinks appetite for home loans in the bond market.

Most mortgage lenders don’t keep their loans; they package them into bonds and sell them to investors. Lenders’ profits are determined by how much the bonds sell for.

A loan marred by a missed payment loses value because of higher risk the loan won’t be repaid. The price of a bond falls if it’s backed by mortgage debt that has become riskier.

When lenders sell loans, the deals normally include clauses allowing investors to force a lender to buy back a loan if the borrower misses an early payment. Roth Capital Partners analyst Richard Eckert said missed payments on subprime loans have become “epidemic,” and investors are sending loans back to lenders with unusual frequency.

New Century made two accounting mistakes: It didn’t assume more investors would sell back loans, even as loan repurchases surged throughout 2006 amid defaults. And, New Century didn’t assume the repurchased loans would be worth less. Piper Jaffray analyst Robert Napoli estimated a repurchased loan has typically lost 15 percent to 20 percent of its value.

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