From the Wall Street Journal:
Subprime Pullback May Crimp Consumer Spending
By CONOR DOUGHERTY, MIKE SPECTOR and ANA CAMPOY
April 2, 2007; Page A2 (no link)
With subprime mortgage lenders pulling back, some working-class Americans are already finding it harder to buy a new home or refinance the one they already own. The big question now for the nation’s economy: Will it also get harder for these consumers to buy cars, shop at the mall and dine out?
Like many American families, subprime borrowers — consumers with poor or sketchy credit histories — have been able to use the combination of rising home prices and easy credit to live beyond their means in recent years as wages have stagnated. That spending has helped to fuel the U.S. economy’s growth.
Today, with the housing market in a slump and defaults mounting in the market for subprime home loans, some economists believe more lenders will tighten credit standards in the months ahead as concerns grow about Americans’ heavy debt load and their ability to manage it. “I don’t ever recall a period in history where one credit problem didn’t ripple through to other areas,” says Susan M. Sterne, an economist at Economic Analysis Associates Inc. in Greenwich, Conn.
Such a spillover might force consumers to rein in spending, particularly lower-income Americans, who have piled up debt at a faster clip than their wealthier counterparts in the past decade. That could be a headache for the retailers, restaurateurs and others who depend on their business.
…
While house prices were rising, the appreciation not only made consumers feel good about the future, it fueled spending by putting cash in their pockets. Low interest rates led to a boom in home-equity loans and so-called cash-out mortgage refinancings, where consumers replace their old loan with a new loan and take out some of their equity as cash. Many less-affluent homeowners spent that money on renovations, vacations and shopping trips.
…
Matt Fellowes, a fellow at the Brookings Institution, found that among consumers who took out home-equity loans, the lowest quarter of income earners spent about 48% of the money on investments, including home renovations and education, about 44% on gifts and living expenses and very little on travel. The next highest bracket — earners in the second-lowest quartile of earners — spent about 55% on investments, 30% on gifts and living expenses and 3.4% on travel and weddings. The two highest income brackets spent a higher proportion of their money on investments and less on living expenses and travel. “That suggests that there is a higher propensity among lower-income families to spend more money than they make,” Mr. Fellowes says.
Used(existing) Home sales crunching !!!
New Century files for Chapter 11 bankruptcy
Monday April 2, 11:17 am ET
NEW YORK (Reuters) – New Century Financial Corp. (Other OTC:NEWC.PK – News) on Monday filed for Chapter 11 bankruptcy protection in the biggest collapse of a mortgage lender in the U.S. housing downturn.
The largest independent U.S. subprime mortgage lender filed for protection from creditors after several lenders forced the company to repurchase billions of dollars in bad loans.
New Century’s largest creditors included units of Goldman Sachs Group Inc. (NYSE:GS – News), Credit Suisse (VTX:CSGN.VX – News), Morgan Stanley (NYSE:MS – News), Deutsche Bank (XETRA:DBKGN.DE – News), Bank of America (NYSE:BAC – News), Lehman Brothers (NYSE:LEH – News), UBS (VTX:UBSN.VX – News), Citigroup (NYSE:C – News) and Countrywide Financial (NYSE:CFC – News).
“We are only at the very beginning of the problems facing subprime,” said Sanford Bernstein analyst Brad Hintz. “What you are seeing is that this liquidity crisis is continuing in the marketplace.”
The 11-year-old company is the biggest casualty so far of the souring subprime mortgage market, where poor underwriting and borrower defaults forced many lenders to post losses, sell themselves, or go out of business.
New Century, like many lenders focusing on people with poor credit histories, was forced to buy back loans from investors that went bad just months after they were made, straining its finances.
This is just nonsense
Even if subprime delinquencies and defaults are up, they’re a tiny portion of total mortgages. Suppose 13 percent of subprime mortgages are in default. Subprime itself is less than 15 percent of total mortgage debt, so that means that roughly 2 percent of mortgage debt is delinquent or in default.
Yes, that’s more than it used to be, and is a disaster for the subprime mortgage companies.
But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent.
So if Subprime is so little and not important why did so many mortgage cmpanies defaulted such as New Century – they were quite huge.
In the last 3 years subprime was over 20%, up to 6-% in Valifornia and arount 30% in NJ
But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent.
Let’s not forget, prices are set at the margin. If these foreclosures sell at 75% of their purchase price, that becomes the new comp in your neigborhood.
Report: Subprime woes to drag housing in ’07
‘The problem in the subprime area is just the tip of the iceberg’
http://www.msnbc.msn.com/id/17903104/
Updated: 12:18 p.m. ET April 2, 2007
LOS ANGELES – The subprime mortgage implosion will take even more steam out of the already slowing real estate market this year and beyond, according to a new economic report.
More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business as a spike in defaults caused by borrowers unable to make payments has rocked the mortgage industry.
Now, as lenders tighten credit standards, the housing market will likely see further declines in price and output, senior economist David Shulman wrote in the quarterly Anderson Report to be released Monday by the University of California, Los Angeles.
“We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,” Shulman wrote. “For all practical purposes, the subprime market is in the process of shutting down.”
A tougher credit environment will limit the number of first-time home buyers entering the market and make it tougher for others to refinance their subprime loans before they face a default or foreclosure.
Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.
“For a housing market that has already witnessed housing starts decline by 36 percent, this is not good news,” he wrote.
Still, he does not forecast a recession but only a softening of the economy.
He expects growth in the nation’s gross domestic product to range from 1.7 percent to 2.5 percent through the first nine months of the year, and to average 3.25 percent next year.
The nation’s unemployment rate will tick up from February’s 4.5 percent to 5 percent by the third quarter before beginning a gradual decline, Shulman wrote.