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During the boom, lenders gave homeowners loans
they couldn't afford. Now they're feeling the
consequences.
When a certain $126,000 subprime loan on a
$696,000 house on the West Coast failed to produce
a single mortgage payment, alarm bells went off at
Clayton Holdings, a company that monitors credit risk.
Closer scrutiny revealed other red flags. The
borrower's previous rent payment had been $1,000,
compared to the $4,482 she was supposed to be
shelling out for both the primary loan and the
$126,000 piggyback. And her stated income was
$84,000 even though she was an hourly worker at
Target.
"We do an autopsy to find out what caused the loss of
blood," says Keith Johnson, Clayton's COO. "It's a CSI
subprime."
In the past few weeks, the bodies have been piling up
fast and furiously. Fallout from subprime mortgages -
that is, home loans to borrowers with a blemished
credit history - gone bad has wreaked havoc on the
industry.
Big names Washington Mutual (Charts) and HSBC
have reported hits tied to their subprime business and
there has been a nonstop barrage of bad news for
major subprime lenders, including New Century
Financial (Charts) and NovaStar Financial (Charts).
Now the worry is what happens to the economy if
enough homeowners go into default and to the
financial markets if enough investors take a bath on
mortgage-related securities.
The market may want to brace itself for more
surprises. "To one degree or another, all of these
lenders are facing the same kind of difficulty," says
Mark Zandi, chief economist with Moody's
Economy.com.
Last year, 13.5 percent of mortgages originated in the
U.S. were subprime, according to the Mortgage
Bankers Association, compared to 2.6 percent in
2000. Overall, the subprime market was $600 billion
in 2006, 20 percent of the $3 trillion mortgage market,
according to Inside Mortgage Finance. In 2001,
subprime loans made ups just 5.6 percent of
mortgage dollars.
By the end of 2006, subprime delinquencies more
than 60 days late jumped to almost 13 percent,
compared to 8 percent a year earlier, according to
LoanPerformance.
Info from CNN Money
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