Loose Lending Shock and Awe

Businessweek: "In a quarterly report that staggered analysts with the breadth of its bad news, the Kansas City (Mo.) subprime mortgage lender revealed a quarterly loss, said it may not have any taxable income through 2011, and strongly hinted its days as a real estate investment trust (REIT) are drawing to a close."

"Chris Brendler, an analyst with Stifel Nicolaus in Baltimore, called the report "alarming" and a "shock."'

"The company's news was especially unwelcome to the market, coming on Feb. 21 just as the Labor Dept. reported a 0.3% jump in core inflation, above the 0.2% increase analysts had expected. That dimmed the prospects of any interest rate cut by the Federal Reserve that could buoy the housing market."

"A subprime mortgage is one granted to borrowers with less-than-perfect credit histories because they've missed payments on credit cards, they are too young to have established a credit record, or a similar issue."

"As housing boomed in recent years, lenders rushed into making these loans, in some cases letting people borrow hundreds of thousands of dollars without ever having to prove their income or assets. Subprime lenders now represent about one-fifth of the overall $5.5 trillion U.S. mortgage market."

"Michael Simonsen, president and CEO of Altos Research, which studies California and 15 other major U.S. real estate markets, says subprime lenders' recent performance is "one of the scariest signs" for the larger housing market."

"The quick growth of subprime mortgages in the recent housing boom has been eclipsed by an equally rapid decline, with several major subprime lenders, ResMae Mortgage, Mortgage Lenders Network USA, and OwnIt Mortgage Solutions declaring bankruptcy since December. Others very well may follow."

'"The majority of the subprime business is with first-time buyers. So it may take several years to shake out," Simonsen says. "But when it comes time to sell and trade up we may find that the low end has been squeezed out." In other words, a meltdown in the subprime market could affect the supply of future buyers for years to come."

"Tightening credit standards may also ripple through the broader market. Lenders across the spectrum are rewriting their loan guidelines, checking applicants' incomes and credit histories far more diligently, and generally becoming more rigorous in the face of consumer and regulatory scrutiny. That will lead to fewer loans and less access to credit."

"On a pool of mortgages NovaStar securitized in September, 2006, more than 3% are more than 30 days past due. "If delinquencies in NovaStar's mortgages continue to rise, pullback from investors in its securities could create a liquidity crunch, limiting NovaStar's ability to originate new loans in the future," analyst Ryan Lentell wrote Feb. 9. After the latest NovaStar news, Lentell added that "liquidity remains our No. 1 concern associated with the firm."'

"In a Feb. 20 conference call with analysts, company NovaStar co-founder Hartman stressed his company's new, tighter lending guidelines and predicted future failures in the industry given the "pretty big number" that have already shut down."