No insulation from subprime

From the Trenton Times:

Feeling the ripple effect

For months, the news from the subprime lending industry has been relentlessly negative, as more and more borrowers with bad credit have fallen behind on their monthly payments — and one lender after another has gone belly up.
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Since December, a raft of bad loans have sunk more than 30 other mortgage lenders, and many banks and Wall Street firms have seen their shares fall because of their exposure to the turmoil.

How any of this might impact Joe Homeowner and the broader housing and lending markets is an open question — one now being hotly debated among economists and housing experts.
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While many experts remain sanguine the rot won’t spread, Stephen Roach, chief economist at investment banking giant Morgan Stanley, said he believes the subprime meltdown is akin to the dot-com crash of 2000 — “the pin that pricks a much larger bubble.”
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As more borrowers default, and the banks that funded the bad loans start taking hits, they are going to become increasingly cautious about lending money — and not just to subprime borrowers, but also to borrowers with good credit, experts said.

The deterioration in the subprime mortgage market has already triggered tighter bank lending standards, judging by the Fed’s January Senior Loan Officer survey. Sixteen percent of responding banks reported tightening lending standards for residential mortgages — the biggest surge since 1990.

“The easy credit of the past two years has been integral in prolonging the housing boom,” said Chen of Moody’s Economy.com. “The extension of credit to households with poor borrowing histories increased the demand for housing. … Turning off this credit spigot will extend the housing market downturn.”
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Tighter credit markets could translate into a decrease in the number of home purchases, experts said. That, in turn, could lead to a further softening of home prices.

“There will be more homes in an over-supplied market and not as many people who can step in to make purchases” said Dean Baker, co-director of the Center for Economic and Policy Research. “At a minimum, it means financing is drying up for those with less-than-perfect credit, and that spells fewer home buyers.

“And foreclosed properties will add supply to a housing market that already has too much.”
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“A lot of people think they are insulated from this problem, but home sales start at the bottom,” McDonald said. “If first-time home buyers aren’t coming into the market, they can’t push the second-time homeowner up the ladder, and then the retirees who anticipate selling their house and are usually in the upper price points don’t have buyers for their homes, so they can’t move.”