US Mortgage Lenders Adapt with Deflating Housing Bubble

Downward momentum in the U.S. housing market is leading some of America’s biggest mortgage lenders to adapt business plans for even softer demand. The lenders are launching new cost cuts and risk reduction strategies that suggest growing concern that the outlook is worsening for the $9.5 trillion home mortgage industry. It marks another racheting down of expectations for the big players in a housing market where slowing sales have pushed inventories up 39 percent in the past year and set home prices on the path of decline, some analysts said.

Lenders are bracing for further declines. Chief Executive Officer Brad Morrice, at New Century, one of the nation’s biggest subprime lenders, told Reuters the company has tightened some credit requirements as it puts “more thought into loans you want to make or don’t want to make.

Countrywide, the nation’s biggest mortgage lender, on Tuesday said it plans to cut as much as $500 million in costs in the next year as it girds itself for an unsettled market. Washington Mutual Inc. has also said it would cut mortgage-related jobs.

While lenders tighten credit requirements to reduce expected defaults, they are taking new risks elsewhere. Countrywide, New Century and Thornburg mortgage Inc. are wading deeper into more lucrative payment-option adjustable-rate mortgages, products increasing in popularity since borrowers can defer all principal and portion of interest for a period.

The lenders conceded the loans have unknown risks as their payments reset higher, but for now are relying on data including credit scores to manage their default exposure.

So far, house prices have not shown an overall decline. Pointing to a further downturn, the National Association of Realtors data show the inventory of homes for sale climbed to a 6.8-month supply in June from 4.4 months a year earlier. Prices rose 1.1 percent in the year, the least since 1995.

Still, many economists are anticipating a soft landing. As long as rates do not rise much more and the economy remains strong enough to support jobs, the market will recover. U.S. interest-rate futures show traders see a 43 percent chance the Fed will raise its target short-term rate an 18th consecutive time at its Aug.


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