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Risky lending impact could reach pensions
Posted by: regli
Date: 02/24/2007 01:38AM
Risky lending impact could reach pensions
http://www.modbee.com/business/v-rssxml/story/13321160p-13947841c.html
By RACHEL BECK
THE ASSOCIATED PRESS
Last Updated: February 23, 2007, 04:41:15 AM PST
NEW YORK — The implosion of the subprime mortgage market should be a stark reminder to investors about the risks of lax lending standards fueling the corporate buyout boom.
A surge in global liquidity and low interest rates have fed a lending bonanza in recent years, driving banks and others to ease loan requirements on everything from starter houses to multibillion-dollar corporations.
That's already come back to haunt mortgage lenders. Borrowers with weak credit have become increasingly delinquent on their loans, a big switch in a market that recently had lenders clamoring for business instead of running from it.
Those risky practices haven't caught up with commercial lenders — yet. But if they do, the trickle-down effect could be far-reaching, even potentially rocking pension funds that have been financing such debt.
As the housing market soared, lenders trotted out adjustable or teaser rates to woo potential applicants with shaky credit records, and let them borrow with no money down. Lenders often did this without investigating financial backgrounds.
That strategy has collapsed as home prices have stopped appreciating or even have fallen in much of the country while interest rates have gone up. Suddenly, those borrowers haven't been able to keep up with their mortgage payments as the rates on their adjustable mortgages have soared. They've also had little opportunity to refinance their home loans.
Delinquency rates — as measured by borrowers in foreclosure or more than 90days past due on their mortgage payments — have shot up from a rate of 7 percent in 2003 to nearly 13 percent late last year, according to Morgan Stanley.
That's hurting the finances of mortgage lenders who tapped into this once fast-growing applicant base. HSBC Holdings PLC, Europe's biggest bank and a major player in the U.S. mortgage industry, estimated that it needs to set aside almost $10.6 billion to cover loans it won't be able to collect.
ResMAE Mortgage Corp., which specializes in the subprime market, filed for bankruptcy court protection earlier this month after Merrill Lynch & Co. Inc. demanded the Brea-based company repurchase $308 million in questionable loans. San Diego-based Accredited Home Lenders Holding Co. reported a fourth-quarter loss of $37.8million, citing a tough credit environment where delinquent loans were 7.18percent of its serviced portfolio, up from 5.45percent in the third quarter.
Some lenders are going out of business. Ownit Mortgage Solutions Inc., a lender based in Agoura Hills, suddenly shut down when bond investors demanded that it buy back underperforming loans it had sold.
This bleak environment is forcing lenders everywhere to change their ways. About 15percent of domestic banks reported that they had tightened credit standards on residential mortgage loans over the past three months, the fastest pace since the early 1990s, according to the Federal Reserve's January Senior Loan Officer survey.
Still, commercial lenders don't seem to be taking the hint.
Despite their lending parallels to the subprime market, they are doling out risky loans to borrowers with weak financial prospects, or more widely allowing loans with limited or no covenants. That means borrowers aren't required to maintain certain financial restrictions on such things as debt levels, interest coverage and net worth.
In particular, they are eagerly lending to private-equity firms, which have been on a record run in debt-heavy takeovers.
In 2006, deals rated "B" and below — which is speculative, or "junk" status — as a percentage of total leveraged loan issuance jumped to 58.2percent from 50 percent in 2005 and by count represented 66.7percent of the market, up from 64percent the year before, according to Fitch Ratings.
This isn't a problem right now, but should the credit cycle turn, "the paucity of covenants in the debt instruments outstanding will very likely lead to higher default rates and lower recovery rates than would have been the case otherwise," said Fitch Ratings senior director William May.
If that day of reckoning comes — the likelihood of which has financial experts divided — the impact won't just hit financial lending institutions. It also could hurt groups such as pension funds that are involved in the lending business.
That's why these risky strategies can't be overlooked. They suddenly could become everyone's problem.
http://www.modbee.com/business/v-rssxml/story/13321160p-13947841c.html
By RACHEL BECK
THE ASSOCIATED PRESS
Last Updated: February 23, 2007, 04:41:15 AM PST
NEW YORK — The implosion of the subprime mortgage market should be a stark reminder to investors about the risks of lax lending standards fueling the corporate buyout boom.
A surge in global liquidity and low interest rates have fed a lending bonanza in recent years, driving banks and others to ease loan requirements on everything from starter houses to multibillion-dollar corporations.
That's already come back to haunt mortgage lenders. Borrowers with weak credit have become increasingly delinquent on their loans, a big switch in a market that recently had lenders clamoring for business instead of running from it.
Those risky practices haven't caught up with commercial lenders — yet. But if they do, the trickle-down effect could be far-reaching, even potentially rocking pension funds that have been financing such debt.
As the housing market soared, lenders trotted out adjustable or teaser rates to woo potential applicants with shaky credit records, and let them borrow with no money down. Lenders often did this without investigating financial backgrounds.
That strategy has collapsed as home prices have stopped appreciating or even have fallen in much of the country while interest rates have gone up. Suddenly, those borrowers haven't been able to keep up with their mortgage payments as the rates on their adjustable mortgages have soared. They've also had little opportunity to refinance their home loans.
Delinquency rates — as measured by borrowers in foreclosure or more than 90days past due on their mortgage payments — have shot up from a rate of 7 percent in 2003 to nearly 13 percent late last year, according to Morgan Stanley.
That's hurting the finances of mortgage lenders who tapped into this once fast-growing applicant base. HSBC Holdings PLC, Europe's biggest bank and a major player in the U.S. mortgage industry, estimated that it needs to set aside almost $10.6 billion to cover loans it won't be able to collect.
ResMAE Mortgage Corp., which specializes in the subprime market, filed for bankruptcy court protection earlier this month after Merrill Lynch & Co. Inc. demanded the Brea-based company repurchase $308 million in questionable loans. San Diego-based Accredited Home Lenders Holding Co. reported a fourth-quarter loss of $37.8million, citing a tough credit environment where delinquent loans were 7.18percent of its serviced portfolio, up from 5.45percent in the third quarter.
Some lenders are going out of business. Ownit Mortgage Solutions Inc., a lender based in Agoura Hills, suddenly shut down when bond investors demanded that it buy back underperforming loans it had sold.
This bleak environment is forcing lenders everywhere to change their ways. About 15percent of domestic banks reported that they had tightened credit standards on residential mortgage loans over the past three months, the fastest pace since the early 1990s, according to the Federal Reserve's January Senior Loan Officer survey.
Still, commercial lenders don't seem to be taking the hint.
Despite their lending parallels to the subprime market, they are doling out risky loans to borrowers with weak financial prospects, or more widely allowing loans with limited or no covenants. That means borrowers aren't required to maintain certain financial restrictions on such things as debt levels, interest coverage and net worth.
In particular, they are eagerly lending to private-equity firms, which have been on a record run in debt-heavy takeovers.
In 2006, deals rated "B" and below — which is speculative, or "junk" status — as a percentage of total leveraged loan issuance jumped to 58.2percent from 50 percent in 2005 and by count represented 66.7percent of the market, up from 64percent the year before, according to Fitch Ratings.
This isn't a problem right now, but should the credit cycle turn, "the paucity of covenants in the debt instruments outstanding will very likely lead to higher default rates and lower recovery rates than would have been the case otherwise," said Fitch Ratings senior director William May.
If that day of reckoning comes — the likelihood of which has financial experts divided — the impact won't just hit financial lending institutions. It also could hurt groups such as pension funds that are involved in the lending business.
That's why these risky strategies can't be overlooked. They suddenly could become everyone's problem.
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