Did you know that sub-prime lenders (those that lend to people with bad credit) are dropping like flies in a cold snap? No? It is common knowledge amongst those who follow business news but it has not made the headlines yet. To get an idea of how fast this turn around was, consider this quote from this New York Times article…..
On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.
What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21.
The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.
New Century Financial is not the only one. Every company that made loans to poor people is having serious problems. Now an analyst at Bear Stearns is saying that….
Tougher lending standards stemming from the shakeout in the beleaguered subprime mortgage industry could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year, a Bear Stearns analyst told investors on Friday.
You might wonder why you should listen to anyone from Bear Stearns. After all they were the same fools who put a buy call on New Century a week before it collapsed. In fact, there are a lot of people out there arguing that problems in the sub-prime market are no big deal. Consider this quote from the LA times….
Many economists, as well as Fed officials, say they don’t believe that sub-prime borrowers account for a big enough share of the housing market to have a dramatic effect on the economy.
Haven’t these people ever heard of canaries in the coal mine?
Bear Stearns might be off in saying that 1.1 million homebuyer will not be able to buy a home this year because of tightening lending standards, but I would not bet against them. Bear Stearns itself has a lot of its own money in the game. They are reputed to have already taken big losses. Their recent pain is what makes me think that they are now a little more grounded in reality.
But regardless of whether you trust Bear Stearns or not, it has always been conventional wisdom that problems in the sub-prime market were early warnings of coming economic problems. Why do people think that this time will be different?
There are a lot of web sites covering this unfolding story. But my favorite is Calculated Risk. They tipped me off to all of links in this story except for the New York Times article.
