By Becky Yerak,

Tribune staff reporter

Saturday, March
3, 2007


The subprime mortgage business is starting to carry a
whiff of the troubled airline industry.


At least 20 U.S.
subprime lenders in recent months have closed, retrenched, filed for
bankruptcy, delayed earnings reports, taken financial hits or been sold or
downgraded amid a rise in delinquency rates.


And federal regulators have noticed.


Worried that "subprime borrowers may not fully
understand the risks" of such lending products as adjustable-rate
mortgages, the Federal Reserve, the Federal Deposit Insurance Corp. and three
other federal regulators on Friday asked lenders to carefully evaluate
borrowers' ability to repay at the full rate.


Regulators don't want marketers of subprime products to
base their lending decisions on "teaser" rates that expire after a
short period of time.


Putting out a call for public comments, the regulators
also noted that the products "may pose an elevated credit risk to
financial institutions."


Indeed, bad news continued to bubble up this week in the
subprime mortgage industry, which serves home buyers with poor or limited
credit records and typically charges two or three percentage points above safer
prime loans.


Shares of Irvine, Calif.-based New Century Financial
Corp. closed down 7.6 percent Friday as the subprime lender announced plans to
lay off 4 percent of its workforce and postponed filing its year-end financial


Even General Motors Corp. might be affected by the
industry's shakeout. The automaker said this week that it would again delay
filing its annual report, triggering concerns about possible troubles in the
subprime lending market through its GMAC unit, whose products include residential


At least one Chicago-area subprime mortgage provider also
has been hurt.


On Feb. 7, London-based HSBC Holdings PLC disclosed that
the impact of slowing growth in housing prices was contributing to a rise in
delinquencies in U.S.
subprime mortgages at its Prospect Heights-based HSBC North America Holdings
Inc. unit.


"The absence of equity appreciation is reducing
refinancing options," HSBC explained.


On Feb. 22, Bobby Mehta stepped down as chief executive
of HSBC North America Holdings, which has about 6,000 workers in the Chicago


On Thursday, even Warren Buffett, chairman of Berkshire
Hathaway, opined on "weakened" home lending practices.


"The `optional' contracts and `teaser' rates that
have been popular have allowed borrowers to make payments in the early years of
their mortgages that fall far short of covering normal interest costs,"
the legendary stock-picker wrote.


"But payments not made add to principal, and
borrowers who can't afford normal monthly payments early on are hit later with
above-normal monthly obligations."


Buffett calls it the "Scarlett O'Hara


"`I'll think about that tomorrow,'" Buffett
wrote, paraphrasing a line from "Gone with the Wind." "For many
homeowners, `tomorrow' has now arrived."


Subprime share rose


From 1994 to 2006, the subprime industry's share of total
mortgage originations climbed from less than 5 percent to 16 percent, according
to the Mortgage Bankers Association.


Lenders "got carried away and had lending guidelines
that were too lax, and it's coming home to roost," said Bill McNamee,
president of the Illinois Association of Mortgage Brokers. "And the
housing market has slowed down, and that's making the problem worse for people
who had gotten themselves in over their heads on their homes."


Malcolm Bush, president of the Woodstock Institute, a
Chicago non-profit that studies housing, said developments in the subprime
mortgage industry come as no surprise. In recent years, he said, there has been
an explosion of "exotic mortgages with a variety of payment schemes that
permit people with lesser resources and credit to buy homes."


Last year, "you began to see a softening in prices,
and mortgage companies began to see a lot of mortgages move into
defaults," Bush said. "The consequence is a much higher rate of late
payments and defaults, and you have major mortgage providers who are doubling
or tripling loan-loss reserves because of what has happened to subprime
customers' payment patterns."


On Tuesday, home loan funds provider Freddie Mac said it
would stop buying subprime mortgages with a "high likelihood" of


About 2 percent of subprime mortgages made last year were
more than 60 days late after five months, nearly twice the rate for ones made
in 2005 and the worst rate in at least seven years, according to a Feb. 22
report from Barclays Capital.