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[Swiss Trader]

The giant US subprime mortgage business is displaying a new-found caution with lenders tightening loan standards and cutting ties to overly aggressive brokers, delegates to an industry conference were told this week. The American Securitisation Forum’s annual conference in Las Vegas took place as an index that measures the health of bonds backed by subprime loans, which are made to borrowers with tarnished credit histories, flashed new warning signals. The index, which measures the spread between the London interbank offer rate and the yield on subprime mortgage bonds rated BBB-minus reached a record 640 basis points on Wednesday and was trading at 625bp yesterday. The spread has widened by about 150bp in the past week. Mortgage delinquencies in the US have reached their highest rate since the 2001 recession, and could rise further in 2007, says Moody’s Economy.com, and loans made last year to borrowers with weak credit histories have been particularly troublesome. “Originators have been lulled into complacency by the strong performance of the mortgage market in the last few years,” said Elizabeth McCaul, partner at consultancy Promontory Financial Group and former New York superintendent of banks. “But that performance was more often a function of strong house price appreciation than prudent risk management.” Fremont Investment and Loan, a California subprime lender, said it had responded by severing ties with about 8,000 mortgage brokers whose loans were responsible for some of the highest delinquency rates in the industry. This and other moves have helped reduce the number of early defaults on its mortgages to 3 per cent from almost 6 per cent in mid-2006, Fremont said. The risk of default by financially stretched homeowners remains the greatest challenge to the $6,000bn-plus market for bonds backed by US mortgage loans, according to a survey unveiled at the conference. Problems remain confined to the minority of borrowers in the subprime category, but they have forced several small lenders to close their doors. “With subprime mortgages, you’re dancing on the edge of a razor blade – they’re awful investments,” said John Devaney, CEO of United Capital Markets, a specialist in distressed asset-backed securities. Others warned US commercial banks could be exposed. Tony Hughes, economist at Moody’s Economy.com, told the conference: “There’s a chance that the commercial banking sector is acutely at risk if there’s a blow up in housing.” Analysts estimate that the commercial banking sector holds up to $1,750bn of residential mortgage loans, accounting for nearly a third of their total assets.

[briarberry]

I can see why, but they left it a bit late though didn't they ?

lenders in trouble - http://ml-implode.com/



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