Shares of the company, which announced that it had less than $60 million on hand, fell by 90%. New Century's loan portfolio changed hands. Morgan Stanley put up for auction $2.48 billion in loans that the company had provided as collateral for a $2.5 billion loan. Bank Barclays bought $900 million in loans from New Century. And the leader of the US mortgage market, Fannie Mae, announced on March 21 that it does not intend to purchase loans from New Century's portfolio.
Chain of bankruptcies
Indeed, by that time, more than 30 mortgage companies had filed for bankruptcy protection, including four large ones. All of them, one way or another, worked with 'subprime' borrowers, who account for 20% of the three trillion dollars in mortgage loans issued in the United States. Some of them, such as Accredited Home Lenders Holding Co. and Fremont General Corp., even tried to get rid of bad loans by announcing their sale at a discount.
The quality of mortgage loans in the portfolios of American organizations working with subprime borrowers leaves much to be desired. Almost any American can get a loan on one terms or another. In some cases, you can do without a down payment, in others - without extra paperwork and confirmation of income level. Moreover, agents have recently been issuing loans to traditionally unpromising clients. For example, a 25-year mortgage was even obtained by an 85-year-old American, Simeon Ferguson, suffering from senile dementia.
The reason for the current situation is simple. Two trendsetters of the mortgage market, Fannie Mae and Freddie Mac, set the standards for dealing with borrowers, taking the lion's share of customers for themselves. The rest work with those rejected by Fannie Mae and Freddie Mac. In general, such borrowers are divided into subprime and those whose credit rating only slightly fails to meet the standards.
The latter, who also account for almost 20% of the market, were the first to suffer from citizens with very low creditworthiness. Amid the bankruptcies of American agencies, they stopped being lent money for housing. For example, financial companies Credit Suisse, IndyMac Bancorp, Goldman Sachs Group and General Electric refused to issue loans without a down payment exceeding 5% of the total cost of the home, especially if the borrower cannot provide documents confirming his income. Thus, the mortgage crisis has already affected about 40% of all market loans.
Horrors of an American town
The number of Americans losing their homes to foreclosure because they cannot service their mortgage loans has reached a 37-year high. The number of such cases in February 2007 increased by 12% compared to the same period last year. In addition, the average defaulter now begins missing payments 33% earlier than in 2006.
All this is aggravated by the general market sentiment and the expectation of rising rates on subprime loans. In addition, demand for homes is falling, and with it prices. Since the beginning of February, the Standard & Poor's index, reflecting the state of housing construction, has fallen by 16%. New home sales are hovering near a four-year low. Homeowners are finding it harder to borrow against real estate or refinance old debts.
But the worst is not that. On March 15, former Federal Reserve Chairman Alan Greenspan stated that the effect of defaults on the subprime mortgage lending market will affect other sectors of the economy, especially if home prices fall. Thus, the volume of housing starts, which fell to the lowest level since 1991, reduced GDP growth by 1.2 percentage points.
Next in the path of the crisis are investors whose funds are placed in mortgage-backed securities transformed into bonds. So far, except for a two-percent dip in mid-March, markets have not reacted to the crisis.
Meanwhile, authorities are faced with a choice between $3 trillion and 2 million citizens. According to financial group Lehman, over the next two years, subprime borrowers will account for $170 billion in unpaid debts, and between one and a half to two million American borrowers will default on their mortgage loans. Democratic Senator Christopher Dodd has already proposed making lending rules for subprime borrowers mandatory. Hillary Clinton spoke out for a softer solution, stating that financial institutions should more clearly explain the terms of mortgages to Americans who could lose their homes in case of non-payment. In fact, we are talking about creating federal oversight of the American mortgage market, whose bubble will burst as soon as rates jump. Apparently, the invisible hand of the market is no longer enough.
Alexander AMZIN.
Lenta.ru