Lenders' Woes with Delinquent Loans

According to an article in Toronto's Globe and Mail, the two biggest lenders in the subprime mortgage market are reporting much bigger losses caused by delinquent loans. Both HSBC Holdings PLC of Europe and New Century Financial Corp are having to increase their bad loan provisions to deal with anticipated problems caused by lending to the riskiest segment of the lending market.

The warnings from these two big players are sending shock waves through the lending community, affecting the stock market as well.

HSBC has a substantial portfolio of what is called "second-lien" mortgages. A second-lien mortgage means that the borrower already has a first mortgage on a home, and this first mortgage will be paid before any other debt in the case of the sale of the home. This type of loan is much riskier than a first mortgage.

The news of lending problems comes on the heels of an economy that has been benefiting substantially from steady economic growth and high housing value appreciation over the past few years. In response to the booming economy, stiff competition in the subprime market led to a loosening of lending requirements. In fact, borrowers were often encouraged by lenders to take advantage of equity in their homes in order to get other consumer goods or to renovate homes.

The line between "responsible" lending practices and "predatory" lending practices became more and more blurred. We've been following this story for some time. Lenders encouraged borrowers into homes, using US tax breaks on mortgage interest payments as a rationale. Lenders defend their actions by pointing to the high levels of homeownership. However, if these subprime lenders now collapse, homeownership could be facing a much graver threat.

Canadians have some good news in this area: Canadian lenders have little apparent exposure to the building crisis in the US.

There is another aspect to this trend beyond blatantly predatory loan practices: lenders have been offering 40 year terms on loans in order to lower payments and entice the buyer into a bigger home. Unfortunately, the new trend to 40 year mortgage loans is not a good move for the consumer. While it lowers payments now, it means tens of thousands (if not more) in interest paid over the life of the mortgage. So the cost to the consumer is very high.

Worried about your lender? Do you want to get out of an ARM mortgage (where interest rates are under pressure) and get yourself into a fixed rate mortgage? Find out if you really should refinance.  If it is the right time for you,  check out some of our sponsors who will be more than happy to help put you in a fixed rate mortgage.

Michael Chantrel
Posted by Michael on March 5,2007 at 7:42 PM
One of your best bets for a "reputable" site that will get you to foreclosure information is the HUD site. You can find it at http://www.hud.gov/homes/homesforsale.cfm. It's a free access page, but it does take you to sites outside of the HUD site. Be aware that some sites that feature information on foreclosures do charge for the information.

One of the best pages I found, which gives you the real goods on how to find properties under pressure, is this one: http://tms.ecol.net/realestate/foreclos.htm
Posted by Tony on March 5,2007 at 6:24 PM
With all of these foreclosures and delinquent payments in the mortgage market, where can i get access to some of these databases.  How can I get a list of where these foreclosers are going and how I could get my hands on it?  
Posted by Michael on February 12,2007 at 7:46 PM
Unfortunately, this is a real problem! People are falling for 40 year mortgages; they are refinancing to fund a lifestyle that is beyond what they make. While it can make sense to refinance in order to avoid a bankruptcy (and the kind of mess *that* makes of your credit), it's happening far too much. In fact, I actually read recently that the savings rate in the US is actually a negative number...

People have to snap out of it. The smallest increase in pressure on a family's finances can send them into a tailspin that might take a lifetime to crawl out of -- if ever.
Posted by WealthyGeek on February 9,2007 at 2:30 PM
I'm wondering how many North Americans are getting second mortgages not for crucial renovations (which may eventually bring a return on their investment) but rather to fund a "lifestyle" that they obviously can't afford. What gets me is that lenders use ethically questionable practices to get consumers to borrow more, then turn around and complain about delinquency. Per capita debt in the U.S. is spiraling out of control and something has to give.

And as far as 40-year mortgages go, I can't imagine how even the most financially illiterate American would fall for this scam. I mean, it's FORTY FREAKIN' YEARS. Are you really willing to risk your retirement just to lower the monthly payment on your soulless McMansion in the suburbs? Here's a better solution: buy a smaller house!
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