Lenders In Hot Water Over Subprime Lending Practices – Loans To Consumers With A Bad Credit Score A Problem

Lenders In Hot Water Over Subprime Lending Practices – Loans To Consumers With A Bad Credit Score A Problem

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(Best Syndication) The Subprime lending industry has mushroomed over the past decade and now some lenders are in big trouble. The FTC estimated that in 1997 the subprime market was just over $125 billion. A recent estimate places the business at $600 billion.

Loans made to home buyers with spotty credit histories have begun to take their toll on such companies as Novastar Financial Inc. and New Century Financial Corp. According to a report in Business Week, these two companies are the hardest hit. "When we see downturns it is very common for large numbers of originators to no longer be around at the end of the cycle," said Andrew Chow, a portfolio manager at SCM Advisors LLC.

Associated Press writer Tim Paradis says lenders are now holding properties in their portfolios as REOs (real estate owned by lenders). To make the situation worse, the real estate market has leveled-off and some of these properties have become harder to unload. This is the concern of investors.

So how is this affecting the subprime lending market? In February, New Century Financial no longer originated loans with 100 percent loan-to-value ratios or second trust deeds. On Thursday they announced “New Century has elected to cease accepting loan applications from prospective borrowers.”

Brad A. Morrice, President and Chief Executive Officer of New Century said "Additionally, we are in active discussions with our lenders and other business partners to refinance our outstanding borrowings and are evaluating other alternatives to improve liquidity." Jonathan Stempel of Reuters says the company may soon seek bankruptcy protection.

During the boom in the real estate market, subprime lenders were able to absorb defaults, but now that values have declined or flattened defaults have become a major concern. To make matters worse for REIT (Real Estate Investment Trust) New Century, they now face investor lawsuits and an investigation by federal prosecutors into the trading in thier stock. The lender is accused of not tracking how often borrowers missed payments. Now those defaults have hurt the company and the shareholder’s investments.

By Best Syndication Staff

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