Lender Woes Go Beyond Subprime

While the stocks of some subprime players have been battered, even diversified lenders and big banks have their concerns

by Mara Der Hovanesian

Few are feeling the hangover from housing's heyday as much as subprime lenders that cater to risky borrowers. The stocks of such players as New Century Financial Corp. (NEW) and NovaStar (NFI) have been slashed, 50% and 63% respectively, since February (see BusinessWeek.com, 2/21/07, "Fears Reignite for Subprime Lenders"). But even diversified lenders and mainstream banks have headaches. Countrywide Financial (CFC) is off 13%, Washington Mutual (WM) has slipped 6%, and Europe's HSBC (HBC) is down 5% since it revealed that its 2006 charges for bad debts would exceed forecasts by $1.76 billion.

Last year underwriters of all stripes loosened their standards despite a weak housing market. Now adjustable-rate mortgages are resetting to higher rates, and homeowners are falling behind on payments. So some big banks and brokerages are exercising their options to sell risky loans back to their originators, usually small, private mortgage brokers and lenders—and plenty of these smaller outfits have gone belly up.

Even so, big banks' loans are souring. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December, 2006, vs. December, 2005, at banks with more than $10 billion in assets, says SNL Financial. Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio. Others, like Freddie Mac (FRE), are finding religion by instituting tougher underwriting rules.

Der Hovanesian is Banking editor for BusinessWeek in New York.