Tougher lending standards stemming from the shakeout in the beleaguered subprime mortgage industry could prevent up to 1.1 million US homebuyers from getting mortgages this year, a Bear Stearns analyst told investors on Friday.
Banks and mortgage companies would sharply scale back lending to two groups: subprime and "Alt-A" borrowers, said Dale Westhoff, Bear Stearns' head of mortgage-backed research. Consumers with low income and/or spotty credit histories are considered subprime borrowers, while Alt-A borrowers are typically those who fall short of being prime because they lack adequate income documentation.
Westhoff estimated a 30 percent, or $180 billion, contraction in the subprime sector in 2007 from 2006, and forecast a 25 percent, or $100 billion, decline in Alt-A loan production from last year.
"This implies a purchase contraction of 1.1 million borrowers," said Westhoff who was speaking at Bear Stearns mortgage conference here. "That's a non-trivial number." In the latest move by a financial institution to tighten lending standards, Countrywide Financial Corp, the largest US mortgage lender, on Friday told its brokers to stop offering borrowers the option of no-money-down home loans, according to a document obtained by Reuters.
There is about $10 trillion in US residential mortgage debt outstanding, according to the Securities Industry and Financial Markets Association. Banks and lenders had relaxed their mortgage standards to court risky but lucrative borrowers at the tail end of the recent housing boom.
Since last year, defaults and delinquencies among subprime and Alt-A borrowers have been spiking higher as they struggled to keep up with mortgage payments. Most subprime borrowers take out adjustable-rate mortgages and have been hurt as their loans reset at higher interest rates.
The borrowers' woes have turned into heavy losses for subprime lenders. About 20 of them have gone out of business in recent months. This week, shares of New Century Financial Corp, the No 2 US subprime lender, plummeted to an eight-year low on Friday as the company faces a criminal probe and has stopped making new loans.
Countrywide disclosed its decision to halt offering no-money down loans in a document obtained by Reuters. Growing problems in the subprime market, which have fanned fears of a broader economic drag, have caught the attention of regulators, including the Federal Reserve. On Friday, Fed Governor Susan Bies said the Fed is well aware of the subprime troubles and has been monitoring the sector for the last several months.
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