Is a blowout coming in the mortgage market?

“Is a blowout taking shape in the impaired-credit mortgage market? Could lax underwriting standards during the boom years — no verification of applicants’ incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy debts — finally be coming home to roost? The omens are unmistakable: Delinquencies — failure to make a mortgage payment when due — in the $1.3-trillion impaired-credit mortgage market hit 12.6% in the latest quarter, up from 11.7%. Delinquencies exceeded 13% among borrowers with so-called subprime adjustable-rate loans.

Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection. HSBC Holdings PLC, Europe’s largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses. New Century Financial Corp., a California-based subprime lender, saw its stock plunge 36% in a single day when it announced that “buybacks” of delinquent loans had been more numerous and more costly than anticipated… Ownit Mortgage Solutions, another California subprime mortgage lender, abruptly went out of business when buyback demands reached a reported $100 million. Ownit’s chief executive, William D. Dallas, acknowledged problems in underwriting, but also blamed bond investors’ demands for high-yielding no-income verification loans.

Angelo R. Mozilo, chief executive of Countrywide Financial, was quoted as saying ‘there’s probably 40 or 50 [subprime loan originators] a day throughout the country going down in one form or another. And I expect that to continue throughout the year.’ What’s going on here? At a recent Senate hearing, a leading consumer-protection advocate, Martin Eakes, chief executive of the Center for Responsible Lending, called the subprime market ‘a quiet but devastating disaster’. “

Los Angeles Times