Still no sign of housing market hitting bottom

About a quarter of all subprime mortgages are in default, resulting in billions of dollars in losses for buyers of securities backed by them. Lenders and investors already have written off some $100 billion in losses, and it’s not clear how high the final tally will go.

The mortgage business boomed from 2002 to 2006, generating lucrative fees for mortgage brokers, lenders, appraisers, credit rating firms, investment banks and investors who bought shares in pools of loans bought from lenders.

At the height of the boom, lenders offered easy terms that included mortgages approved with  little or no documentation of the borrowers’ savings or income.  In some cases, these so-called “liar loans” inflated a borrower’s financial abilities to make their mortgage payments. Loans were also approved at owner-occupied interest rates to homebuyers who had no intention of moving in.

Many of the loans now headed for default were sold with low “teaser” rates that jumped to much higher levels after two or three years; while home prices were rising, mortgage holders were able to refinance before the resets hit. Now, with home prices flat or falling, many borrowers face sharply higher payments on a mortgage with an outstanding balance larger that value of their home.

The resulting wave of defaults has touched off a round of lawsuits among borrowers, lenders and investors. State and federal investigators have also found that some loans were approved based on fraudulent information, and investigations into lending practices are ongoing.

One such investigation, led by New York Attorney General Andrew Cuomo, is looking into disclosures made by Wall Street firms that sold shares in loan pools to investors. At issue is whether investment bankers adequately disclosed the credit risks to rating agencies and investors.

Cuomo recently reached an agreement with Clayton Holdings of Shelton, Conn.,  which analyzes such loans and has agreed to cooperate. Clayton was given immunity from civil and criminal prosecution, although there was no evidence of its wrongdoing.

Clayton reportedly has told prosecutors that beginning in 2005 it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. At issue is what information was given to investment banks and rating agencies about the quality and risk of the loans that were reviewed.

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