Subprime Fallout Widens

Problems in the subprime mortgage market continue to ripple across the country as investors retreat from the sector and politicians debate how to address the issue.

The U.S. House of Representatives is considering passing a non-binding resolution directing government agencies to enforce rules aimed at eliminating underhanded practices by mortgage lenders that work with subprime consumers. The resolution also presses lenders to better evaluate mortgage applicants’ ability to repay their loans. Subprime generally refers to consumers with lower or spotty credit ratings.

Inside Mortgage Finance found that subprime mortgages accounted for 20 percent of all mortgages originated in 2006, according to The Wall Street Journal today. The Journal reported the subprime loan delinquency rate was 13.77 percent in the first quarter, up from 11.5 percent a year ago.

A number of state legislators are frustrated with Washington’s inability to offer anything more substantive than a resolution, according to Bloomberg.com. Proposals pending in Missouri and Illinois would put more regulations on prepayment penalties that are charged to some subprime mortgage borrowers. A measure in Massachusetts would create a fund that could lend up to $25,000 to homeowners facing foreclosure.  Legislators in Michigan seek to make mortgage fraud a felony, with violators seeing prison time and fines up to $100,000, according to Bloomberg.

The housing market received good news today when the Mortgage Bankers Association reported a 1.1 percent rise in its index of applications to buy a home or refinance a loan. It was the second week in a row the index as risen.

The housing market finds itself in trouble due to aggressive mortgage lenders that provided loans to unqualified borrowers using adjustable rate mortgages that offered a low or no down payment deal and limited-time low monthly payments. Many borrowers, eager to get into a new home, soon found they couldn’t cover the bill when the initial low rate expired and their monthly mortgage jumped higher.

Yesterday, the stock market dropped after rating agencies Standard & Poor’s and Moody’s reported they planned to lower the ratings of hundreds of bonds backed by subprime home loans valued at more than $12 billion. The Dow Jones Industrial Average ended down nearly 150 points, or 1.1 percent, to close at 13,501.70. Moody’s lowered its ratings on 399 bonds while S&P reported it was reviewing ratings on 612 bonds.

The stock of subprime mortgage lender and loan service firm Novastar Financial Inc. was trading at $7.66 midday today, down more than 3 percent after falling more than 6 percent yesterday. In April, Kansas City, Mo.-based Novastar announced it was exploring strategic alternatives including a sale of the company.