|
Subprime Poor Credit Borrowers Suffer
Lenders also took a hit, and man were forced out of business. As the problems spread like a virus to more credit worthy borrowers, hedge funds, banks and other investors in mortgage backed securities also took a huge financial hit.
As troubles in the housing and credit markets burdened companies and consumers, the economy logged slower growth in the early fall according to the Federal Reserve.
Business activity around the country was more subdued, but the report didn't suggest that such activity is in danger of collapsing. Spending by individuals was uneven and suggests growth was slower in the early fall. The manufacturing and service sectors continued to expand, but growth weakened; mostly for products and services related to home construction and real estate transactions.
To keep the economy expanding, it is vital that companies and people spend and invest at a sufficient pace, not to suddenly and drastically reduce spending which could send the economy into deeper turmoil.
The Fed report detected that businesses; instead of consumers, feel more uncertain about the economy. Many real estate contacts expect housing markets to remain subdued for several months. At firms without direct ties to real estate and construction, contacts are still wary that credit tightening and slowing construction might slow activity in their industry, but there is cautious optimism because few see much evidence of such spillovers at this time.
Federal Reserve Chairman Ben Bernanke warned that the housing slump will be a significant drag on economic growth into next year. Yet, for all the problems the country has had to cope with, the economic performance so far this year has been reasonably good. The ultimate implications of the credit crunch on the broader economy, however, remain uncertain.
What helps buffer people from the bad effects of the worst housing slump in 16 years; plus the credit crisis, is the fact that employment is still healthy and there have been wage gains. But tightening credit approval requirements make it more difficult for bad credit people to finance high cost purchases such as homes and cars, as well as for businesses to expand operations and hiring.
Lenders in many districts tightened credit standards, including for consumers and all types of real estate. Consumer lending grew more slowing in most districts. Lending for home mortgages, equity lines and refinancing continued to soften or decline in most districts. Overall business lending was up, but tightening lending standards were applied, particularly for real estate.
The housing slump deepened and; in some instances, buyers could no longer secure financing or were unable to sell their current homes. Facing a glut of unsold homes, new home construction fell 10.2% in September to a pace of 1.191 million units - the slowest building pace since March 1993.
The commercial real estate market; however, remained solid. But some reports suggested that developers are becoming more cautious and in some cases are shelving or canceling projects.
New home construction plunged to the lowest level in 14 years as turmoil in credit markets intensified existing housing industry problems. The decline was more than double the 4.2% drop that analysts had been expecting and it pushed activity down to the lowest level since March 1993.
Analysts said the higher than expected drop in housing construction could be signaling that the housing downturn, already the worst in 16 years, may be headed for worse troubles. Housing activity is now 30.8% below the level of a year ago.
After a five-year boom in which housing sales climbed to record highs, demand for both new and existing homes fell last year and prices, which had been soaring at double digit rates, have been stagnant.
The slump has intensified in recent months as mortgage lenders have tightened loan approval standards in response to the high risk of escalating defaults. The higher defaults and the inability of prospective buyers to qualify for mortgages have contributed to record high levels of unsold new and existing homes.
Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson warned this week that the housing downturn was likely to persist longer than had been expected.
Many economists expect housing will trim growth by more than a full percentage point in the current quarter, but they believe the country will avoid an outright downturn because the Fed, which cut rates for the first time in four years in September, will cut rates again should further weakness develop.
The National Association of Homebuilders reported this week that its index of builder confidence fell to an all-time low in October.
"Builders are in a panic mode and are trying to catch up with a rapidly falling market," said Mark Zandi, chief economist at Moody's Economy.com.
The government report showed that applications for building permits, considered a good sign for future activity, fell sharply in September, dropping by 7.3% to 1.226 million units, also the weakest pace in 14 years.
Only the Northeast showed construction gains in September with activity rising by 45.4% in that region. Construction starts fell by 10.1% in the West, 11.7% in the South and 28.4% in the Midwest.
The nation's more than $2 trillion home mortgage business won't brake its current downturn anytime soon, with mortgage originations expected to fall 18% next year and decline another 6%, the Mortgage Bankers Association predicts.
Although it contributed to the breakdown, the industry still predicts a future for the subprime, bad credit loan market, albeit with tighter lending requirements for poor credit people.
The housing downturn has been most severe in the subprime market, where mortgages are held by poor credit people and/or those with low incomes.
Despite spiking foreclosures and bankruptcy filings by several subprime lenders, mortgage bankers aren't giving up on the industry, which has been an important factor boosting U.S. home ownership to people who might otherwise be unable to secure a home. Subprime borrowers may have to make sizable down payments before securing a mortgage loan and provide documentation of their incomes, employment histories and credit standing.
|
