L.A. Times: Sub-prime loan market shaken up - "It means a lot of people are going to lose their homes"

This story is a bit late being posted, but it remains important nonetheless. The ongoing financial health of mortgage lenders has been a hot topic. There is now a website dedicated to tracking lender implosions. This February 8 story by E. Scott Reckard discusses the train wreck of New Century Financial Corporation, a sub-prime lender right here in our backyard (Irvine). According to the L.A. Times story, New Century has just reported "huge losses" on sub-prime mortgages to borrowers with bad credit, high debt loads, and other financially undesirable traits.

Last year, as home sales started leveling off, some lenders loosened their lending standards to try keeping the gravy train rolling. That's like giving even more crack to a cokehead. New Century has reversed course and started tightening their loan policies, but guess what! Those who got loans with easy-money terms from 2004 are going to find it impossible to refinance this year! These borrowers will be trapped when their loans reset.

The article states as much as $800 billion in AR mortgages are going to reset higher this year. 1 out of 11 home loans is both adjustable and sub-prime, according the the Mortgage Bankers Association.

Investors are starting to back away from mortgage-backed bonds, which are created from pools of very risky mortgage loans.

Another sub-prime casualty in our area is Ownit Mortgage Solutions of Agoura Hills, which has filed for bankruptcy protection. Investors who purchased Ownit mortgages were demanding that Ownit purchase them back after they had gone bad, and Ownit's response was basically to shut down.

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In a potentially related story, what's with the busier than usual turnover in the Federal Reserve? Fed Governor Susan Bies is resigning and will not be at the March meeting. Her term was supposed to run to 2012. She is regarded as the resident expert on banking and risk management. Hmmm. The heads of the Atlanta, Chicago, and Boston Federal Reserve banks are all being replaced this year.