Developing Story: No Loans For You!

A: New Century Financial Corp. has STOPPED accepting loan applications altogether because some of the subprime mortgage financial backers are refusing to provide access to financing. Wow. Just more evidence that subprime woes are only in its infancy and that federal regulation of some kind is inevitable! Calculated Risk goes into more detail and provides a link to New Century's 8-K filing with the SEC.

Are you blind in your understanding of what is really going on in the housing market outside of New York City? If you are, then you don't care about this subprime stuff because it accounts for under 10% of all loans out there. However, if you are not blind and have been reading any financial news publication lately, than you know that subprime woes are just beginning to get major media coverage! Fact is, outside of NYC the housing market is fairly weak and loans are getting harder and harder to lock in. Its only the beginning and what happens next is still unwritten.

According to CNN Money:

New Century Financial Corp. said late Thursday that it has stopped accepting loan applications because some of the subprime - mortgage specialist's financial backers are refusing to provide access to financing.

"As a result of the current constrained funding capacity, the company has elected to cease accepting loan applications from prospective borrowers effective immediately, while the company seeks to obtain additional funding capacity," New Century said in a statement.

"The company expects to resume accepting applications as soon as practicable; however, there can be no assurance that the company will be able to resume accepting applications," it added.

Lenders specializing in such loans, like New Century, rely in part on big banks known as warehouse lenders to finance their operations. These backers require that subprime lenders meet certain minimum financial targets; otherwise, they have the right to end the business relationship.

On Friday, New Century said it had breached one of those requirements, or covenants, and also disclosed that it's the subject of a federal criminal investigation.

In yesterday's Businessweek article titled, "The Mortgage Mess Spreads":

After years of easy profits, the $1.3 trillion subprime mortgage industry has taken a violent turn: At least 25 subprime lenders, which issue mortgages to borrowers with poor credit histories, have exited the business, declared bankruptcy, announced significant losses, or put themselves up for sale. And that's just in the past few months.

Now there's evidence that the pain is spreading to a broad swath of hedge funds, commercial banks, and investment banks that buy, sell, repackage, and invest in risky subprime loans.

According to Jim Grant of Grant's Interest Rate Observer, the market is starting to wake up to the magnitude of the problem, entering what he calls the "recognition stage." Says Terry Wakefield, head of the Wakefield Co., a mortgage industry consulting firm: "This is going to be a meltdown of unparalleled proportions. Billions will be lost."

Affect on NYC - Nothing yet but things will change. As lending standards tighten, this city filled with co-op's already requiring a strict board review process will get stricter. Listing brokers will be forced to tighten their pre-qualification review of the prospective buyer and those with high salary's and plenty of liquid assets will all of a sudden be more valuable to the seller. This might give more negotiating power to the high end buyer as they provide a comfort to the seller during the buying process; especially for a co-op. All cash buyers will gain much greater control during negotiations! Pre-approvals from lenders in the bid submission phase will be useless as getting a loan commitment now becomes the major obstacle. Expect the buyer pool to restrict a bit and borrowers to redefine the range of purchase prices that they can afford. Talking to a lender before a bid is submitted will become a priority, rather than a secondary tactic as it is now. It will no longer be, 'how much can we get a lender to give us', and will become more of a 'I hope this lender can come through for us' type of environment. The lending world is changing and NYC will not be immune forever.

UrbanDigs Says: I've said it before and I will say it again! The biggest threats I see to the housing market are tighter lending standards and a weakening labor market! Right now we are neck deep in an environment where tighter lending standards are being put in place for subprime borrowers. It is only a matter of time until prime lenders follow suit; especially if the fed gets involved and puts regulations in place to protect the consumer. This 'credit crunch' will restrict purchasing power and limit the buyer pool's size and stretchability when it comes to how much they can afford! Question is, what do you believe?

Related Posts:

Credit Crunch: Tighter Lending Standards

Credit Update: HSBC Warns of Bad Debts

Lenders Starting To Tighten!

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