Fears of US mortgage crisis as homeowners face 12% interest
Pastor Dale Morgan
Fears of US mortgage crisis as homeowners face 12% interest*
· Shares fall on worries for wider economy
· Research predicts 2.2m defaults on homeloans
Larry Elliott and Jill Treanor
Wednesday March 14, 2007
The Guardian
The US central bank was under pressure last night to underpin the
country's troubled housing market as figures showed an increasing number
of US homeowners falling behind with their mortgage payments and having
their properties repossessed.
The problems had a knock-on effect on Wall Street where the Dow Jones
Industrial Average fell 242 points to close at 12,075 amid fears the
malaise in the housing market would infect the rest of the economy.
There were signs of mounting problems for firms that have aggressively
sold home loans to people with poor credit ratings - so-called sub-prime
mortgages.
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The US Mortgage Bankers Association (MBA) yesterday pushed back its
forecast of a rebound in the real estate market from the middle of 2007
until the end of the year after reporting an increase in both late
payments and foreclosures in the final three months of 2006. It said
defaults had risen for all loan types but were particularly marked for
those with sub-prime mortgages with adjustable rates.
Borrowers with loans totalling $265bn (£137bn) are scheduled to have the
interest rates on their mortgages reset this year and many of the
poorest homeowners in the US could face interest rates as high as 12%.
The Fed meets next week to set base interest rates but is expected to
leave them unchanged at 5.25% despite the latest mortgage default figures.
Research by the Centre for Responsible Lending has predicted that one in
five of the sub-prime mortgages made in the past two years will end in
foreclosure, resulting in the biggest crisis for the mortgage market in
modern times.
The centre said 2.2m sub-prime home loans had already failed or would
end in foreclosure and that the losses to homeowners could be as high as
$164bn.
The data from the MBA showed total mortgage defaults up from 4.67% to
4.95%, but sub-prime delinquencies rose from 12.56% to 13.33%.
The problems have most clearly been illustrated by New Century
Financial, which is on the brink of bankruptcy without enough cash to
repay its own lenders. Its shares have been suspended by the New York
Stock Exchange and it has admitted receiving a grand jury subpoena as
part of a criminal inquiry into trading in its shares as well as
accounting errors. State regulators in Massachusetts yesterday ordered
New Century to fulfil its promises on loans in process and barred it
from making new loans. It was coordinating its order with several other
states, including New York, New Jersey and New Hampshire.
Other states, however, were reluctant to take action that could
contribute to a lender filing for bankruptcy, leaving borrowers stranded.
Congress is also considering tougher standards for the mortgage market.
Republican Carolyn Maloney, who chairs the house subcommittee on
financial institutions and consumer credit, plans to introduce a bill
that would impose more restrictive guidelines, including a requirement
that lenders consider the ability of a borrower to pay back an
adjustable-rate loan over the entire term - not just at the beginning,
when "teaser" rates are extremely low.
"You can't hand out loans that people can't repay," she said.
Some analysts and executives said lawmakers and regulators missed
earlier opportunities to scrutinise the mortgage industry, and worry
that a belated overreaction could make matters worse by choking off
funds to the poor and further weakening the housing market.
More than 12 lenders have left the industry in the last year but while
HSBC, Britain's biggest bank, has run into difficulties with its
mortgage business in the US - forcing the first profits warning in its
history - it has insisted these are not people in the sub-prime category.