Does anybody know where New Century Financial Corp. can get a subprime loan?
The Irvine, Calif.-based mortgage maker on Monday announced that its Wall Street lenders are cutting off its financing – a move that pushes it closer to bankruptcy. New Century’s stock – which traded for $66 in 2004 – fell about 50 percent to $1.66 before the New York Stock Exchange halted trading.
New Century’s three foun ders made more than $40.5 million selling stock from 2004 to 2006, according to published reports. The company now says it’s under investigation for stock sales and accounting errors. This is what can happen when you take billions of dollars of Wall Street’s money and loan it to people with bad credit histories.
The wreckage belongs to institutional investors holding defaulted subprime debt, anyone holding New Century’s imploded stock and homeowners losing property values to a rash of foreclosures – particularly in Colorado.
“New Century is committed to serving the communities in which it operates with fair and responsible lending practices,” the company declares on its website.
What we may soon learn is that in too many cases, mortgage lenders made loans to people who had no business buying homes. They got commissions, fees and even stock options to make the loans – which they promptly sold to Wall Street investment banks. The investment banks in turn sold them to institutional investors, such as insurance companies and hedge funds. So the people who made the loans had little short-term economic incentive to worry about whether they would be paid back.
Subprime lending is just one of the ways the mortgage industry put people into homes they would not be able to afford in the long term. As interest rates hit 45-year lows in 2003, mortgage makers delivered a menu of adjustable-rate mortgages, interest-only notes, no-money- down loans and negative-amortization mortgages with low, low monthly payments but ever-rising balances. There are even “stated income loans,” where borrowers state their income and the lender believes it.
Recession risks
The problem is that now interest rates have inched higher and many of these loans either reset or must be refinanced at a higher rate. The Mortgage Bankers Association estimates that more than $1 trillion worth of adjustable-rate mortgages will reset at a higher rate this year.
It’s so risky, it amazes even someone who buys corporate junk bonds for a living.
“I thought it was incredible when I first heard of no-down- payment, no-documentation loans,” said Jerry Paul of Greenwood Village-based Quixote Capital Management. “I never would have believed people would do this.”
Tucker Hart Adams, chief economist for U.S. Bank Colorado, says mortgage woes could help spark a recession, which she predicts may begin in the last three months of this year. Adams, long concerned about Americans’ growing debt levels, says nothing can put the brakes on economic growth like a nation of foreclosures and house- poor consumers.
“There are going to be a lot of people who can’t afford their homes,” Adams said. “Or if they can afford it, they are going to do it by drastically cutting back spending in other areas. That’s a guarantee of a recession. Consumers are 71 percent of economic activity.”
Others share blame
Not to blame the next recession entirely on mortgage lenders. Banks and credit unions, for instance, hold on to the mortgages they make and retain an interest in loan quality. And the others? Well, to a large extent, they simply provided what Wall Street was willing to lend and what consumers were willing to borrow.
Chris Neuswanger, a mortgage broker with Macro Financial Group in Vail, said all loans have their place. Subprime loans help borrowers get back on their feet after a divorce or a bout of unemployment. And stated-income loans are good for those who earn a lot in some years and little in others.
“There are a lot of companies that should never have been in this industry,” he said. “And it’s tragic that a lot of people got approved for loans and now they are losing their homes. But let’s not say that all subprime loans are bad and all stated-income loans are evil.”
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to him at denverpostbloghouse.com/lewis, 303-954-1967 or alewis@denverpost.com.
