The problems in the US subprime mortgage market continue to resonate through American financial markets, despite official attempts to downplay the problems.
Some commentators are now likening the subprime mortgage problems to the collapse of the tech and net boom back in 2000.
US Treasury Secretary Henry Paulson last week said the problems would not spread and had been contained to the subprime sector and a leading member of the Fed made the same comments while also telling a public forum that there would be more instability among lenders and others financing those types of mortgages.
The US stockmarket has become very aware of the potential of the problems to rattle confidence.
US analysts now worry that the fallout from the rising level of loan defaults in the subprime market could hurt consumer confidence as lenders tighten credit amid the housing slowdown.
US mortgage rates fell to their lowest level in a year last week: around an average of 6.14 per cent.
US ten year bond rates ended up on Friday, closing at 4.56 per cent on the latest jobless figures but the concentration is on subprime lenders like New Century Financial, the biggest of them all, which has stopped making loans and could collapse in the next week or so according to US media reports over the weekend.
The worry is that with the US housing market heavily over supplied, lending across the board will fall as potential borrowers pull their horns in and lenders raise their criteria and avoid the subprime sector, which has driven the growth in housing for much of the last three years.
That’s already happening.
New Century says it has stopped accepting new loans, a unit of GE Money which lends to the sector has stopped and is laying off 40 per cent of its staff, while a third lender told staff over the weekend that all loans above a 95 per cent LVR (loan to valuation ratio) would not be accepted from Monday.
US Federal Reserve Governor, Susan Bies said Friday night (our time) that US banks were just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring.
Bies, who is the Fed’s top banking policy official, warned that banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.
She was quoted in media reports as saying “This is not the end, this is the beginning”.
Bies reportedly said US regulators were concerned about so-called payment shock in mortgage loans made to borrowers with weak credit histories whose payments rise sharply after the cheap introductory period ends.
US bank regulators have been watching rising numbers of cases of missed payments and defaults in the subprime market since last spring and the Fed and four other Federal US bank regulators released proposed guidelines 10 days ago instructing banks to strengthen their underwriting standards and offer clear disclosures on loan terms to subprime borrowers.
But Bies was also quoted as saying that the said problems in the mortgage market are well-contained in a very narrow segment (the subprime sector.).
Over 20 mortgage companies have gone bankrupt, closed operations or sought buyers since the start of 2006.
But the problems are not confined to the single purpose subprime lenders.
We have already seen that huge banks like HSBC and Citigroup have been hurt (with HSBC writing off billions of dollars on subprime loans) while GMAC, the finance arm of General Motors, may have to write-off $US1 billion on risky loans it made into the sector.
General Electric Co’s WMC Mortgage arm is sacking more than 450 staff members and also stopped lending home loans to borrowers who can’t or don’t make a deposit.
WMC is a part of GE Money whichaccounted for28 per cent or so of GE’s revenues of $US163.39 billion last year. That will mean a hit to the profit and loss account.
And Countrywide Financial Corp. America’s largest US mortgage lender, told its brokers on Friday to stop offering borrowers the option of a “no-money-down home loan”.
Media reports said the ban on loans with an LVR (LTR in the US) above 95 per cent starts Monday.
