UNIVERSITY STUDENT ISSUE

What can 70,000 students teach you?

SANDY FARRAN,TONY KELLER April 2 2007
UNIVERSITY STUDENT ISSUE

What can 70,000 students teach you?

SANDY FARRAN,TONY KELLER April 2 2007

Imploding lenders and toxic loans

BUSINESS

BY PATRICIA TREBLE • The Mortgage Lender Implode-O-Meter website, www.ml-implode. com, isn’t quite as funny as it sounds. It has no wacky YouTube-like videos, but 1.2 million viewers have checked it out since Dec. 31 anyway, to track the growing list of American mortgage lenders “that have croaked since late 2006.” At the beginning of this week, the number was at 41, up from 33 in just two weeks. A recent addition was New Century Financial Corp., in a fiscal meltdown after its own bankers stopped loaning it cash.

As the housing market softens across the U.S., the country’s subprime mortgage sector is particularly vulnerable. In the past few years, as the economy boomed, lenders pursued higher-risk borrowers, offering mortgages with no down payment and only cursory income checks. Now, with interest rates up and many loans automatically resetting to higher monthly payments, owners are in trouble. Last Tuesday, the Mortgage Bankers Association said that 17-9 per cent of subprime mortgages were either past due or in default, compared to 6.1 per cent of all home loans. And the pain is beginning to spread: that same day, the Dow Jones Industrial Average dropped 242 points and General Motors pumped US$1 billion into its former finance arm to deal with mortgage problems.

While the bad news has been concentrated in the Katrina-devastated states of Louisiana and Mississippi, even booming states like California aren’t immune. More than 20 per cent of subprime loans are expected to fail in Los Angeles and other cities in coming months. Adam Topaban, a strategist at Lehman Brothers, says the market hinges on an estimated US$900 million in adjustable-rate mortgages that will reset over the next two years. His worry: that “any kind of sharp pullback in lending could lead to a vicious spiral of continued housing price depreciations and defaults.” It’s the same fear keeping millions of Americans up at night. M