KANSAS CITY, Mo. - While the subprime lending industry's woes have kicked up dust in the past few weeks, observers say the problems underlying the bad news have been percolating for much longer.
In December, the Washington, D.C.-based Mortgage Bankers Association said 12.6 percent of subprime mortgages were 30 or more days delinquent in the quarter ending in September, compared with 4.7 percent of all mortgages. That was an increase from a 10.8 percent delinquency rate for the third quarter of 2005.
Ellen Schloemer, the director of research for the Durham, N.C.-based Center for Responsible Lending, said about a quarter of subprime loans sold since 1998 have gotten into trouble at some point, although they didn't always go into default or foreclosure. Still, she said, the housing boom and the large number of lenders led many of them to approve loans that clearly weren't sustainable.
"It was a disaster waiting to happen, and people were looking the other way because there was money to be made," Ms. Schloemer said.
Analysts aren't that critical, but they agree a shakeout in the industry could do it some good, eliminating the fly-by-night lenders and strengthening the survivors.
A resurgence in the housing market and lower interest rates would certainly help, but that assumes the industry can recover quickly enough to keep banks interested in underwriting people with questionable credit.
"If the investment banks and larger institutional lenders are afraid to lend ... the money to underwrite subprime loans on a short-term basis, that's the concern we have with these companies," Morningstar analyst Ryan Lentell said. "If they can't finance new loans, that would have a detrimental effect. That's what has led a lot of these companies to leave the business."
Some lenders are trying to show they still have control over the situation, saying they're tightening credit requirements or are selling off the worst of their loans. They say the loans sold in 2006 should be the bottom of the barrel and the ones sold in 2007 will be much more reliable.
H&R Block Inc., which is looking to sell its Option One subprime lending arm, said Thursday it has seen default rates in the first 30 days of loans decline from 3.83 percent in the second quarter to 3.13 percent in the third quarter.
"Six months into having identified this issue we're starting to see the light at the end of the tunnel," Chief Executive Mark Ernst said.