Monday, October 16, 2006

A New Era for New Century

Recently, it had been reported that the Federal Reserve as well as other federal regulatory bodies have been quietly “cracking down” on the sketchy, misleading and even predatory lending practices that had become commonplace during the historic housing boom but now we have proof.

Last week, Brad Morrice, CEO of New Century Financial Corporation (NEW.NYS), a real estate investment trust and the second largest (by market-share) subprime lenders in the United States issued the following statement:

"In light of recent regulatory guidance and the changing interest rate and housing environment, we have reevaluated our programs and practices and developed enhanced policies and techniques to reinforce our goal of providing fair and informed access to credit,"

Today, analysts at Stifel Nicolaus & Company downgrade New Century Financial Corporation to "sell," after citing research they performed suggested that the new underwriting guidelines would likely dramatically reduce loan origination volumes possibly disqualifying 20% - 50% of all loans that would have been issued prior to the guidelines implementation. Their 2007 EPS forecast for New Century Financial was reduced to $4.50 from $6.95.

This is HUGE news to say the least.

Finally, you can now see that there really will be significant changes implemented in the lending industry resulting in dramatically reduced number of loan qualifications.

There’s is not doubt, this is a “turning back the clock” so to speak, on the lending practices that so greatly contributed to creating the national housing bubble in the first place.

This reversal is one of the main reasons you won’t see a “soft landing” bottom or “bounce back” in the housing market even if interest rates remain stable.

Thousands, possibly even millions of borrowers who would have been otherwise qualified for home loans in 2005 are not going to be now and thoes that do qualify will be certainly be qualified for less.

The following are some of the truly unbelievable underwriting changes New Century Financial will adopt:

  • Tightening underwriting guidelines for its adjustable-rate mortgage programs for at-risk borrowers. This includes using the fully-indexed rate minus 1 percent as the qualifying rate for these borrowers.
  • Offering existing adjustable-rate mortgage (ARM) and interest-only customers who qualify the option of refinancing into a low fee 30-year or 40-year fixed-rate mortgage.
  • Implementing plain language disclosures that go beyond legal requirements in explaining terms such as prepayment charges, interest-only features, adjustable-payment features, escrows for insurance and taxes and other key features of a loan.
  • Enhancing its processes for confirming the income information provided on stated income loans. In addition to the closing certification currently employed, the company will introduce a new front-end confirmation early in the loan process to assist applicants in better understanding the terms of their loan.

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