Sub-Prime Lender Woes Continue

CNBC is reporting that New Century Financial may be filing for bankruptcy later today, and their stock price has taken a 25% interday hit this afternoon. This follows on the heels of problems with Fremont General, another large sub-prime lender, who a couple of days ago told its staff in Anaheim to clean out their desks and take an extended leave of absence.

An increasing level of late payments and defaults in the sub-prime loan industry is spreading, and while foreclosures are not as yet much of a factor in our local market, it has become a factor dragging down home prices in other parts of the nation.

In response, the lending industry including Fannie Mae and the Federal Reserve are urging stricter lending guidelines, with verifications of employment and income, increased levels of down payment and reserves required of borrowers, and in general, a retrenchment to historical standards for making loans. As a result, marginal borrowers and potential home buyers, especially in the starter home market, may be eliminated from the housing market, particularly in the higher priced areas. It is conventional wisdom that without a healthy starter home market, the move-up home seller is unable to sell, thus affecting higher and higher home price levels. Locally, with the starter home being a $250-300,000 condo, we can see some of the effects of restrictions on the entry level home buyers.

Credit availability and loan ability moves the housing market. With the tightening of lending standards, the only other way to stimulate our housing market is in building more affordable housing. A healthy starter home market will ripple up through all home pricing levels.