'NEW YORK (CNNMoney.com) -- Just as the struggling real estate market seems to be stabilizing, a fresh problem is brewing far from real estate offices or home construction sites: a jump in defaults by higher-risk borrowers.
News of rising default rates by buyers with less than stellar credit could put a crimp in financing for home purchases - and prices. That's because the rapid growth of new types of mortgages was one of the key factors behind the boom that sent home buying, and prices, to record highs for five straight years through 2005.'
What? Do they mean to say that the skyrocketing prices of the past several years wasn't organic? You mean it was (gasp!) an artificial situation, created by loose underwriting, crooked appraisers, and realtor hype? And WHAT stabilization of the market are they speaking of? The last I checked, there is record inventory and record defaults and a sharp decline in nearly every major market (in Florida, that would be EVERY market).
'Last week, some serious problems cropped up due to rising defaults. HSBC (Charts) announced its bad debt charge last year would be about $1.8 billion higher than expected as problems grew in U.S. mortgage securities it had purchased, particularly loans to borrowers of less than top credit, a sector of the industry known as subprime mortgages.
And lender New Century Financial (Charts), which specializes in subprime loans, announced it would have to restate results for 2006 to account for losses on defaulted loans it would be required to repurchase. That news sent its shares tumbling by more than a third on Thursday, and hit lenders throughout the subprime sector.'
So, what is happening now?
'Beyond whatever problem the rising defaults in the subprime sector might cause to those lenders and their investors, the news was a setback for the struggling real estate market, according to experts in the field.
The problems with subprime loans are likely to lead to problems for many potential home buyers with less than top credit ratings. That's because most lenders don't hang onto their mortgage loans. Instead, they package them with other loans of similar quality and sell them as securities, providing cash to make additional loans.
Some experts estimate that rates for subprime mortgage loans could rise a half to three-quarters of a percentage point because of the higher default rates, and that could top a full percentage point if the default problem gets worse.'
It's about time the banks wised up - qualifying people for loans that far outweigh their ability to repay is bad, bad, business. The question is, how does this affect the overall economy?