In New York on Wednesday, shares of NovaStar Financial, a lender to people with weak credit records, known as the subprime market, fell almost 43% after the company announced a loss of $14.4 million for the fourth quarter and told investors that it might not make enough money to pay dividends for the next four years.
Earlier in February, global bank HSBC, stunned the market with the news that it was adding $1.76 billion to loan provisions of $8.8 billion because of a big rise in defaults in the US subprime home loan market.
A rise in defaults is prompting some US lenders to clamp down on the use of "piggyback" mortgages, a risky type of loan that helped prolong the housing boom by allowing borrowers to finance up to 100% of the purchase price. Fremont General Corp., a major lender to people with weak credit records, is reported to have has stopped providing these second mortgages, which are frequently used by financially stretched "subprime" borrowers who can't scrape together a down payment.
The Wall Street Journal reported last week that the subprime mortgage market has mushroomed in recent years as lenders found that investors both in the US and abroad were eager to buy securities backed by such loans. Thomas Lawler, a housing economist, estimates that 17% to 18% of mortgage-financed home purchases in the U.S. last year involved subprime loans. About half of the subprime home-purchase loans included in mortgage securities last year were piggybacks, according to a recent report by Credit Suisse Group in New York. And about 43% of subprime loans packaged in securities in 2006 didn't require the borrowers to fully document their income or assets, a type of mortgage sometimes derided as a "liar's loan" because it can encourage borrowers to exaggerate their means to get a loan.
Borrowers have been rapidly falling behind on loans made in the past year or so. In November, payments were at least 60 days overdue on 12.9% of subprime loans packaged into mortgage securities, up from 8.1% a year earlier, according to First American Loan Performance, a research firm in San Francisco.
