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Subprime homeowners foster regret for U.S. lenders By Al YoonReuters Fri Dec 15, 2006 8:14 AM ET NEW YORK (Reuters) - A rush to profit by funding home purchases for Americans with poor credit records has come back to bite the hands that fed the movement. The year-long slump in the U.S. housing market has resulted in smaller profits or losses at lenders of so-called subprime mortgages, until recently the fastest growing segment of the $10 trillion U.S. residential loan market. For years, higher margins on such mortgages paid off for lenders and Wall Street as rising home values reduced risks to investors. Now lenders such as New Century Financial Corp. "The time has come" for an end to easy credit, said Bob Moulton, president of Americana Mortgage Group Inc., a mortgage broker in Manhasset, New York. Moulton, who deals with prime and subprime loans, said lenders who were once aggressive in vying for high interest rate loans have suddenly made themselves scarce. The pullback may affect the fifth of the 300 million U.S. population that would qualify as subprime borrowers, according to estimates of Fair Isaac Corp., whose "FICO" scores are benchmarks for consumer credit. About 14 percent of all mortgages are subprime, up from 2.4 percent in 1998, Mortgage Bankers Association data show. As failing loans begin to hit earnings, a behavioral shift is under way at subprime lenders and banks that include risky loans in their product mix, including Well Fargo & Co. At least two subprime mortgage lenders, Agoura Hills, California-based Ownit Mortgage Solutions and Sebring Capital Partners LP of Carrollton, Texas -- initially funded by former Dallas Cowboys star Roger Staubach -- shuttered operations in December. Companies up for sale include H&R Block Inc.'s "There's still too much capacity in the market today," said Jim Konrath, chief executive of Accredited Home Lenders in San Diego, California. Defaults are rising on subprime loans created in 2006 at a rate twice that of 2005 as lenders lowered credit requirements, analysts at UBS Securities said. Defaults of subprime loans backing bonds rose to 7.74 percent in August from 5.53 percent a year earlier, according to Friedman Billings Ramsey Inc. Default rates on Accredited's 2005 loans are three times that of mortgages issued in 2004, the largest increase among subprime lenders studied by Bear Stearns & Co. Even so, Accredited's delinquencies are still the lowest among peers, according to Bear Stearns "Sub-Prime Slacker Tracker" data. POISON PILL The drop in home price appreciation has become a poison pill to the industry, Konrath said. House prices nationwide rose 0.86 percent in the third quarter, the slowest pace since the second quarter of 1998, federal data show. Borrowers have escaped higher payments by getting fresh loans and tapping new-found equity. For those now lacking the credit or equity to refinance, loan rates can jump to more than 13 percent from about 7 percent, Americana's Moulton said. Until recently, loans "continued to perform because the buyer always had an out if (he) got in trouble," said Konrath, who guided Accredited though the industry's last shake-out in the late 1990s. "As the market started to change, credit was still expanding. The industry didn't react" fast enough, he said. Defaults are currently about average since January 2000 but higher than the abnormally low levels reached at the height of the housing boom. The slowing price appreciation has put once-patient investors on edge and more likely to return loans sustaining early defaults. Lenders say they must respond briskly to staunch bleeding. New Century is making fewer loans to first-time homebuyers with other risky attributes such as high loan-to-value ratios and undocumented income. Accredited has cut back on loans that finance 80 percent of the home as well as the 20 percent down payment, and boosted requirements for income documentation. As for when tighter underwriting will show up in loan statistics, "it's kind of the pig-through-the-python type of problem" and so will take time, Konrath said. Undoubtedly, as the universe of eligible borrowers contracts, the industry must follow, analysts said. Wall Street firms like Bear Stearns are buying lenders to help their growth in the $565 billion home equity asset-backed market, but only exits from the business can reduce capacity, they said. No one is predicting that companies will drop out as fast as they did after the 1998 fall of hedge fund Long-Term Capital Management, which contributed to the collapse of six of the top 10 subprime lenders. But few believe the fallout is over, either, said Robert Napoli, an analyst at Piper Jaffray & Co. in Minneapolis.
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