Notebook > Money

Loan rangers

Money | Default rate by subprime mortgage borrowers is the wild card in a strong economy

Issue: "Tortilla wars," March 10, 2007

The past few months have been bitterly cold for the U.S. housing market. The Commerce Department reported that new home construction fell 14.3 percent in January to the lowest level in almost a decade.

That report came on the heels of a survey from the National Association of Realtors that found sales of existing homes had fallen in 40 states during the fourth quarter of 2006. According to the NAR, the median price for existing homes was 2.7 percent lower at the end of last year than at the end of 2005.

This type of bad news was predictable and widely suggested by analysts during the housing boom earlier this decade. Too many mortgage lenders were offering too many loans to overextended homebuyers, often without requiring any down payment and with adjustable rates that were all-but-certain to adjust in one direction only: upward (see "ARMs have legs," Nov. 25, 2005).

We see you’ve been enjoying the content on our exclusive member website. Ready to get unlimited access to all of WORLD’s member content?
Get your risk-free, 30-Day FREE Trial Membership right now.
(Don’t worry. It only takes a sec—and you don’t have to give us payment information right now.)

Get your risk-free, 30-Day FREE Trial Membership right now.

Many of these mortgages, it turns out, were too good to be true. The default rate on subprime mortgages was over 13 percent in the last quarter, and hundreds of small subprime lenders have gone out of business. HSBC Holdings, a major subprime mortgage lender in the United States, reportedly expects to lose more than $10 billion on home-loan defaults.

"You are starting to see the repercussions of bad decisions," Mike Thomas, managing partner with Hyperion Capital Group, told The Denver Post. "These lenders are having to eat these loans that they made on 100 percent financings."

So far, the damage from the housing trouble hasn't had much of an effect on the broader economy. Unemployment is very low, inflation is relatively tame, and the economy is growing strongly. A credit crunch brought on by housing's problems is one of the few potential speed bumps that analysts say could slow growth and bring on a recession this year.

Balance Sheet

TAXES: The IRS says millions of taxpayers are not claiming a special refund that is due to most Americans. The one-time refund, which ranges from $30 to $60 based on the number of exemptions listed, is for telephone excise taxes collected between March 2003 and July 2006. Anyone who has had long-distance telephone service in recent years is eligible for the refund, but the IRS says more than 10 million early filers did not request it.

INFLATION: A big drop in energy prices caused U.S. producer prices to fall 0.6 percent in January, according to the Labor Department. Core producer prices, which exclude energy costs, rose 0.2 percent. "Inflation pressures appear to have abated," Federal Reserve chairman Ben Bernanke told Congress.

BUSINESS: Home Depot Inc., which saw its profits soar with the housing boom, is now watching them fall with the housing decline. Profits dropped 28 percent in the fourth quarter of 2006 at the Atlanta-based home improvement chain. "We may not be able to impact the housing market or general economic conditions, but we know that we can improve our performance relative to our overall market share," said CEO Frank Blake, who took over the company in January. "That will be a central point of emphasis for us in 2007 and beyond."

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

Comments

You must be a WORLD member to post comments.

    Keep Reading

    Advertisement