Irvine-based New Century Financial Corp. wasn't the only so-called sub-prime lender, passing out easy-money loans to people who probably shouldn't have gotten one. But the company's collapse has so far been the most dramatic, and already appears to be impacting the economy as a whole.
Now, if more and more homeowners default on their loans -- flooding the market with foreclosures -- and the marketplace starts to clamp down on who qualifies for a loan (limiting the number of available buyers), all of us homeowners could be in for a shock.
If home values start to really drop, those of us who bought in the past few years could suddenly see our homes worth less than our mortgages.
Of course, this is exactly what a lot of people -- including me -- thought would eventually happen: Loads of defaults and foreclosures once the rash of ARMs first approved in 2005 and 2006 suddenly adjusted.
This was a recipe for disaster: Take people with low credit scores and no downpayment money. Give them a manageable adjustable rate mortgage to get their foot in the door -- but with a catch: The loans will soon adjust to a new rate nearly double that original rate. C'mon!
New Century apparently couldn't help itself. Risky loans were the only way to prop up their sales volume last year, as the market began to cool. Perhaps they were deluded -- after all, defaults were rare until recently, as people who couldn't afford their adjusted mortgage rates could either sell their house at a hefty profit, or refinance.
But home values are now stagnant --- as are sales. And as this week's coverage of the growing subprime mess has illustrated, it's going to get uglier. The L.A Times writes:
Easy-money loans from New Century Financial Corp. and other lenders specializing in borrowers with poor credit helped fuel the housing boom, swelling the ranks of homeowners with people who could not have qualified for mortgages in years past.
But many of these borrowers turned out to be bad bets after all and are beginning to default, forcing some lenders out of business and leading others to stiffen their lending standards.
That could hurt the housing market by shrinking the pool of eligible buyers. In addition, many homeowners with high-risk loans whose rates will adjust upward in the next year or two won't be able to refinance into loans with better terms. That could put some into foreclosure.
"If foreclosures continue to mount -- and they are already climbing rapidly -- we could see a scenario similar to California in the early 1990s, where banks' sales of foreclosed properties pushed home prices down even further," said Zach Gast, an analyst at the Center for Financial Research and Analysis, an investment research firm.
In some parts of the state -- including the Central Valley, the Inland Empire and San Diego -- foreclosures have gone from rare to plentiful in a little more than a year. Real estate appraisers say home values are beginning to be affected.
George Hatch, a San Diego appraiser, said he surveyed a group of his colleagues last week. Almost all of them reported that they were running across distressed sales or foreclosures.
"There is a flip side to exuberance, which is that every party has its hangover," said Hatch, a 22-year veteran of the business. "When your house loses $100,000 in value, that will make you sick all right."
Yup, I'm queasy. As are people who did business with New Century: Last year, the company's stock was worth as much as $52 a share. That plummeted to $1.66, before the New York Stock Exchange halted trading on the stock.
More:
The collapse in sub-prime is "a warning sign" for California, said Anthony Sanders, professor of finance at Ohio State University and a former Deutsche Bank executive. "I wouldn't be at all surprised if we got a [housing market] crash, especially if interest rates rise."
Ray and Ruby Hayes of Yorba Linda aren't so sure things will work out.
Ray Hayes, 62, said the couple refinanced their home with a sub-prime lender in the spring to get cash to help them make ends meet.
"We had bad credit but were told that in six months we could refinance and get a better loan with a lower interest," he said. But when they tried to refinance, Hayes said, the lender told them they were not eligible for better terms.
The Hayeses are now months behind in their payments. "Things just spiraled out of control," he said.
Forbes has more here.
Heckuva job, New Century. And that's why Franklin Avenue has named the Irvine company its Angeleno of the Week. (And yes, we're using "Angeleno" broadly to refer to all of the Southland. My feeling: If you're served by L.A.'s radio and TV market, you're fair game for our weekly feature.)
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