Saturday, March 03, 2007

Mortgage Losses Compound Stock Market Woes

Both the L.A. Times and New York Times today have, as their lead stories in their Business sections, the intensifying problems of mortgage firms which have been making sub-prime loans to housing buyers. The largest firm making such loans, New Century Financial of Irvine, Calif. is under a federal investigation, and another large lender, Fremont General Corp., of Santa Monica, is saying it will sell its sub-prime business.

The fact is that, just as with the savings and loan associations more than a decade ago, many unwise loans have been made to unworthy borrowers. Most of the mortgages that have been financed for people with poor credit have been adjustable, which means that after a time, their rates go up, and people who really can't afford to pay are saddled with higher payments. Under that situation, and with declining home sales prices, there have been an increasing number of defaults. New Century's stock price has fallen in recent months from 66 to 11.

And the trouble may extend beyond sub-prime loans. The New York Times reports that American Home Mortgage Investment has found that more than 8% of loans made to medium credit risks are overdue, compared to less than half a percent at this time last year.

Up until recently, overly-optimistic economists have said the housing price declines would be minor. Now, this is no longer so sure. Lower home prices, and fewer sales, have also affected the construction companies, which are consequently building fewer homes, and the whole problem has begun to put stress on overall economy and the stock market. This was one of the reasons the market went south this week.

With newspapers, stock analysts are always ready, it seems, to say, "let's cut back." But in many cases the analysts haven't been quick enough to advise cutting back on investments in housing, or in advocating that such firms as New Century and Fremont exercise caution in making loans to unworthy customers.

In many cases, people have been buying homes with no down payment. Then, when prices do go down, their homes are worth less than what they paid for them, at the same time that adjustable rates are bringing big increases in their monthly payments.

The economy is cyclical, and no amount of clever financial planning can avoid the cycles. Still, this is further proof that the best, appropriately cautious, people aren't working on Wall Street.

The housing problems may well get worse before they get better, and particularly in high priced housing markets like California's. It's good that under its new editor, Davan Maharaj, the L.A. Times Business section is right up there with the New York Times covering them.


In an interview in Mother Jones, ousted L.A. Times editor Dean Baquet discusses, at greater length than before, details of the changes in management of the Tribune Co. that brought pressures on him and John Carroll to downsize the L.A. Times. He says the retirement of Jack Fuller in 2003, which brought the inept Dennis FitzSimons into the CEO's position at Tribune Co., marked the beginning of the heavy pressure for cuts, which he and Carroll tried to resist.

Baquet reports Monday to his new job as Washington Bureau chief for the New York Times.



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