Subprime Window May be Closing

In a recent conference call about its 2004 earnings, New Century Financial — which reported closing $42.2 billion in mortgages last year, warned investors that many companies in the sector are operating below cost, according to investment publication FindProfit. The Irvine, Calif.-based lender said competition has intensified significantly in the past 90 days and it believes that some players are originating loans below cost.

So what does that mean for borrowers?

It means that mortgage rates for borrowers with less than perfect credit are closer than usual to rates for borrowers with good or conforming credit.

While subprime rates had been as high as 15% a decade ago, strong growth in the sector has led to more competition and more competitively priced loans — some barely higher than conforming rates. And mortgage securitizations, the process of bundling a pool of mortgage loans and selling them off to investors, has provided liquidity to the market — helping to push subprime rates down further.

Another factor that has helped push subprime rates down is the refinance meltdown. As many originators were unable to maintain the feverish pace of production that accompanied some of the lowest rates of the last few decades, they either left the business or scrambled to make it up another way — many by entering the subprime market. Increased competition means lower prices.

While news of New Century’s comments sent shares of subprime companies tumbling, it also sent a message to mortgage brokers and borrowers that lower subprime rates may be short-lived.

If lenders are operating below cost, some will go out of business while others will be pressured by investors to make a profit. In either case, upward pressure will be placed on subprime mortgage rates.

Related:

New Century Outlook Stuns Subprime Investors
Shares of subprime companies sank last week after New Century lowered its earnings outlook and warned that other players are operating below costs. And the market’s reaction to the announcement is just a precursor of things to come, according to one investment publication.

Sam Garcia has been in mortgage lending since 1980, and is publisher of MortgageDaily.com and MortgageChronicle.com.

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