A fascinating analysis of the subprime strife in The New York Times this weekend compared the speedy downturn of subprime securities to the dot-com boom and crash of a few years ago. The story starts with an analyst who’d advised investors March 1 that shares in New Century Financial — an Orange County-based lender of subprime loans, or mortgages to consumers with less-than-perfect credit — were a good buy. But just a week later, the stock price for New Century, which had already been halved to $15 recently, had collapsed to $3.21.
From the analysis:
The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.
Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.
Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.
I had a hard time choosing what to quote from this piece — you’ve really got to read the whole thing. The story discusses the fact that pension and hedge funds invested in the market sector, which yielded high returns while the market was rising.
The reporter also ties the subprime slump to prolonged pain for the nation’s housing market, similar to my story last week on the potential problems in store for the San Diego housing market because of tightened regulations:
Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market.
I heard mention of this in a radio story this morning and tracked down a Reuters story from last week discussing the potential impact of new regulation to the customers who seek adjustable-rate mortgages from Countrywide Financial Corp., the biggest mortgage lender in the country.
Sixty percent of Countrywide’s customers seeking hybrid adjustable-rate mortgages, or ARMs, such as “2-28” loans would fail to qualify under the guidance that urges lenders weigh the borrower’s ability to repay at the highest possible rate during the life of the loan, Countrywide CFO Eric Sieracki said at a Raymond James Financial Inc. conference in Orlando, Florida.
Countrywide joined the Mortgage Bankers Association in lobbying unsuccessfully against legislation that passed through Congress a couple of weeks ago that would make it tougher to qualify for a risky loan.