The Los Angeles Times reported today that the trouble that hit Wall Street earlier this year because of defaulting subprime loans made in 2005 and 2006 could continue to slam the economy.

The sub-prime loans backing mortgage bonds created early this year are going bad even faster than those issued in early 2006, a year that set a record for delinquencies on such loans, according to two new studies.

One of the studies, by Michael Youngblood, director of fixed-income research at FBR Investment Management in Arlington, Va., found no evidence that standards had tightened for sub-prime mortgages in this year’s bonds, despite a sharp rise in defaults that began late last year.

“It really is astonishing,” Youngblood said. “It’s as if the lessons of the past two years were ignored in early 2007.”

The Times pointed out that despite the signs of trouble in the first few months of 2007, mortgage giant Countrywide didn’t stop making the high-risk subprime loans until August.

And it was only after Countrywide’s move that most of its competitors followed suit because all but the biggest of them follow the acknowledged leader, Youngblood said. …

“If you’re Wells Fargo or Chase or the Bank of America, you can make your own weather,” Youngblood said. “But everyone else is in the wind behind Countrywide.”

While that company made 7.3 percent of the subprime loans securitized in 2006 nationwide, it made 10.8 percent of such loans this year, according to the Times.


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