Late mortgage payments growing

Posted on February 05 By MLP Blog

Trouble is spreading to borrowers with better than subprime records.

Turmoil in the mortgage market is ensnaring more companies who lend to people with decent credit.

The spread of home lending woes beyond loans to those with weak credit threatens to reduce the availability of loans for some consumers and even threaten the existence of some lenders.

Rising delinquencies and defaults among subprime borrowers — those with blemished credit histories — have resulted in more than two dozen lenders going out of business, moving into bankruptcy protection or putting themselves up for sale.

Now the so-called Alternative-A mortgage sector, which loans to borrowers with better credit than subprime borrowers but not quite prime, is starting to hurt.

One Alt-A lender, American Home Mortgage Investment Corp. of Melville, N.Y., announced late last week that it was having trouble selling its mortgages into the secondary market and would have to cut its earnings forecast for the quarter and the year. At least five analysts downgraded the stock on Monday, and its shares fell more than 15 percent on the New York Stock Exchange. The shares dropped $2.37, or 11 percent, on Tuesday to close at $19.55.

Fulton Financial Corp., which owns two Lehigh Valley area banks, also is feeling pain from its Alt-A lending.

The Lancaster company said last month it expects to take a $5.5-million charge from buying back Alt-A mortgages issued by a bank it owns in Virginia. The bank is being forced to repurchase loans it usually sells because borrowers are falling behind on payments.

Fulton has not reported loan problems at its Valley-area banks, Lafayette Ambassador Bank of Easton and Skylands Community Bank of Warren County, N.J. Fulton owns 13 community banks in the mid-Atlantic region.

Other Alt-A lenders that have taken hits in the market in recent days are First Horizon National Corp. of Memphis, Tenn., which some analysts predict may be forced to sell out to a bigger bank, and M&T Bank Corp. in Buffalo, N.Y.

Guy Cecala, publisher of Inside Mortgage Finance Publications in Bethesda, Md., said a ”backlash” from the subprime market meltdown is part of the equation.

”While you’re starting to see some deterioration of the quality, it’s not so much that investors should be dumping [mortgage-backed securities],” he said. ”But nobody wants to own a security that goes down in value, whether because of public perception or the reality of the market.”

Doug Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C., said that Alt-A mortgages made up a small share of the U.S. market at about 6 percent of outstanding loans. Loans to prime customers, who are the most creditworthy, make up 74 percent; those to subprime borrowers are about 11 percent, and government-backed loans total about 9 percent.

Alt-A borrowers traditionally had credit scores as high as prime borrowers, but often provided less documentation of their finances; in recent years, however, some Alt-A borrowers have had credit scores closer to subprime borrowers and still weren’t asked for full documentation.

Duncan said he expected to see some increase in delinquencies and defaults in the Alt-A market this year, but said the bigger problem was that investors appeared less willing to invest in these loans because of the deepening subprime problems.

That will be a factor in slowing mortgage origination this year to an estimated $2.2 trillion from a peak of $3.9 trillion in 2003 and $2.5 trillion last year, Duncan said.

In fact, The delinquency and default rate for Alt-A mortgages has been considerably less than for subprime mortgages, according to First American Loan Performance, a research firm based in San Francisco that looks at mortgage loans packaged into securities and sold to investors.

The First American data shows that January payments were 60 days late on 14.3 percent of subprime loans, up from 8.4 percent a year earlier. The late-payment figures for Alt-A loans was 2.6 percent in January, up from 1.3 percent a year earlier.

Still, companies that write the Alt-A mortgages are finding that investors are less willing to buy securities that are backed by mortgages — or are demanding significantly higher returns.

Among the biggest Alt-A lenders in 2006 were IndyMac Bancorp Inc. of Pasadena, Calif; Countrywide Financial Corp. of Calabasas, Calif.; Residential Capital, or ResCap, of Minneapolis, a holding company for the residential mortgage operations of General Motors; EMC Mortgage Corp. in Irving, Texas, a subsidiary of The Bear Stearns Cos.; and Washington Mutual Inc. of Seattle.

Glenn Costello, a managing director with the Fitch Ratings agency in New York, said that some of the Alt-A lenders were trying to distinguish themselves from others, arguing that they were worth investors’ continued attention because they had lower delinquencies and fewer problems.

”But the fact remains that for some of the riskier products they originate, there’s a lack of demand for them” as investors get pickier about the market, he said. ”Investors just aren’t willing to pay what they used to.”

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