Lenders still play fast and loose

LA Times ^ | 18 October 2007 | Staff

[shrinkermd]

Although the sub-prime mortgage meltdown has been years in the making, unmistakable signs of trouble emerged last year when the housing market first started to dip. Nevertheless, a new report found that sub-prime mortgages issued in the first half of 2007 defaulted at even faster rates than those issued in 2005 and 2006, when risky lending practices were still in vogue. That's because lenders didn't tighten the criteria used to gauge a borrower's ability to make his or her payments.

The report by investment banker FBR Investment Management is the best evidence yet of the flaw that eventually shook the entire credit market: Too many companies cared only about cranking out new loans, not about borrowers' ability to repay them. That's especially problematic for sub-prime borrowers whose income and credit histories put them at greater risk of default.

There's no need to shed tears for reckless lenders or borrowers. But policymakers should still try to find ways to cushion the blow faced by inexperienced home buyers and the economy as a whole. Treasury Secretary Henry M. Paulson Jr. predicted Tuesday that more than 1 million homes would go into foreclosure this year, including 620,000 bought with sub-prime loans. And with the interest rates on 2 million sub-prime loans due to jump in the next 18 months, the picture is likely to stay grim for awhile.

[quant5]

The Fed has done and will continue to do what it can. Beyond that, I see lots of banks offering loan restructuring from adjustable to fixed rate loans. Most consumers now can stop their own bleeding. Other then that, let the free market work. Besides, those of us who were responsible and conserved cash rather then buying the new Mercedes or 50’ plasma are salivating for the housing market bottom to increase our wealth. I am waiting until the end of 2008 to begin buying.