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With lenders closing, exotic loans are vanishing
By Dan Seymour
The Associated Press
NEW YORK — A mortgage industry in turmoil is taking a variety of home
loans off the shelf, meaning people with bad credit or who need flexible
terms will end up paying more — or in some cases not be able to obtain one
at all.
Two of the country's biggest home lenders — American Home Mortgage
Investment and New Century Financial — went bankrupt. Last week, HomeBanc
said it will not issue any more loans, and Impac Mortgage Holdings ended
"alt-A" loans for people with limited documentation or slight credit
issues.
Across the country, lenders large and small are closing, and in some cases
failing to meet commitments to fund loans.
"Every day I hear about a number of lenders that are reducing their
products," said George Hanzimanolis, president of the National Association
of Mortgage Brokers. "It is going to take a while before the dust
settles."
The reason marginal borrowers are being cut off from credit or being
charged a lot more, while the market for "vanilla" mortgages is unscathed,
stems from the buckling of a multitrillion-dollar industry hatched on Wall
Street.
The market for investments backed by mortgage debt, including bonds backed
by home loans and a complex, risk-splicing security known as a
collateralized debt obligation or CDOs, has exploded in the past few
years.
Investors bought more than $2 trillion in mortgage-backed securities last
year, according to the Securities Industry and Financial Markets
Association. Issuance of mortgage-backed securities in the past five years
was more than double the issuance in the preceding five years.
With lenders accessing all that cash and competing for business, many
eased their standards. By funneling so much cash into the industry, these
financing markets encouraged lenders to offer a slew of exotic loans that
stretched beyond past lending standards.
Now, snakebitten by a cold housing market and a breakdown in credit
quality, these financing markets are in shock. Prices for bonds backed by
mortgage debt have tumbled, and there are few if any buyers for CDOs.
"We have already seen quite a retrenchment in the availability of
mortgages for subprime borrowers," said Sal Guatieri, senior economist at
BMO Capital Markets. "There certainly will be less funds available because
investors are pulling back. ... Suffice to say it will be increasingly
difficult to get a mortgage at a fairly low rate unless you have pristine
credit ratings."
Copyright © 2007 The Seattle Times Company
Saturday, August 11, 2007
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