As I lamented in yesterday’s post Banking On Profits, Not Risks, the lending industry and investors have had short attention spans when it comes to understanding risk. As the housing market continues to either cool or stabilize, depending on what local market is being discussed, a new focal point is arising…lending.
With the housing bubble as a media topic nearly worn out, or even with a few kicks left in it, subprime has taken the torch as one of the next hot (er…sorry) topic. Today alone, the Wall Street Journal had seven stories on subprime lending. And here is an endless supply of other sources on the topic as well.
Institutions looked at subprime as a growth sector in an otherwise highly competitive mortgage landscape. Large fees, higher margins were some of the attractions of the lenders like HSBC, Novastar, New Century Financial and Citigroup. Now its all about damage control.
In today’s Heard on the Street column Subprime Game’s Reckoning Day [WSJ]:
If these so-called subprime borrowers continue to have problems paying their debts, the lenders that target them likely will have to boost how much money they set aside for bad loans, cutting into their bottom lines. That could mean even lower stock prices.
There also is a concern that if the real-estate market remains cool, some borrowers with better credit histories might also begin struggling to make payments on certain popular, but unorthodox, mortgages. These types of loans allow borrowers to skip monthly payments, carry low short-term teaser rates or don’t require detailed financial documentation. If that happens, companies such as BankUnited Financial Corp. and Countrywide Financial Corp. could suffer.
And today, Freddie Mac announced that it will toughen subprime lending standards [Reuters]. Here’s Freddie’s press release. Ever notice how these things are announced AFTER its a problem? After all this is a quasi-government corporation that sets standards for secondary market investors. Seems like there was a lack of foresight on this issue.
Here’s a great primer on the topic by Jouhn Makin called Risk and Return in Subprime Mortgages [AIE].