I noticed subprime mortgage lenders New Century Financial (NEW) and Accredited Home Lenders (LEND) on the new lows list today. Seeing LEND there surprised me because I remember it being on my Notable New Highs list earlier this year. LEND’s share price has been chopped in half in the last six months.

Looks like the market is anticipating lots of defaults as the teaser-rate loans from 2005 reset next year? I welcome comments from people with insight into the state of the mortgage lending market now.

UPDATE: My spam blocker knocked out all the comments that contained the term “mortgage” I think, but a reader emailed me the following comment so I’m able to post it in full:

Just a note with regards to LEND and NEW.

Being a Mortgage Broker for 20 years, I’ve rode the wave up and now it’s coming down.

Most of the subprime borrowers have been refinancing every other year and pulling money out, living on equity. I’ve seen hundreds of chain of title recordings showing this.

Most brokers when they refinance a client will go through another sub prime lender to avoid dealing with the current sub prime lender, and you will see this on a chain of title. Now that property values have stopped going up, a lot of borrowers are unable to refinance and pull money out.

We have seen the current sub-prime rates inch up over the last 3 months, mainly from the secondary market downgrading the CMO’s from these lenders.

As of now, it’s becoming difficult helping a lot of clients because of the higher rates and with property values starting to fall, appraisals aren’t coming in at a high enough value to allow us to refinance some of these customers.

If they can’t be helped, most of them are in serious trouble from the standpoint most sub-prime loans are 2/28 or 3/27 (fixed for 2 or 3 years) then they re-adjust.

Most sub-prime loans, being adjustables are based on an index, usually the Libor index which say is in the mid 4 percent range plus the margin which is on average 6 percent.

Given this, most of these borrowers are re-adjusting from a start rate of around 6 to 7 percent when their loan was originated a couple of years ago to a new rate of around 9 to 10 percent when it re-adjusts.

Most of these borrowers will have a extremely tough time paying the new payment. And remember, most of these borrowers didn’t have good credit to begin with, that’s why they were given a sub-prime loan.

Mike
Chicago, IL