Rising Subprime Mortgage Defaults Add to Unsold Homes Inventory
Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices, according to CreditSights Inc. In January, 4.09 million new and existing homes were offered for sale, down from 4.43 million in July 2006, the National Association of Realtors and the U.S. Commerce Department said. New homes accounted for 536,000 of the January total, down from a record 573,000 in July.

Rising Subprime Mortgage Defaults Add to Unsold Homes Inventory
By Brian Louis

March 9 (Bloomberg) -- Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices, according to CreditSights Inc.

In January, 4.09 million new and existing homes were offered for sale, down from 4.43 million in July 2006, the National Association of Realtors and the U.S. Commerce Department said. New homes accounted for 536,000 of the January total, down from a record 573,000 in July.

A five-year housing boom that ended a year ago was fueled in part by the growth of mortgage products marketed to borrowers with poor credit histories. Now, as defaults on subprime loans surge to a seven-year high, more than 20 lenders have closed or sought buyers since the start of 2006. The survivors are raising their lending standards.

``We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default -- an unwelcome phenomenon given the existing supply surplus,'' Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.

The glut of homes on the market has led potential buyers to hold off purchases on expectations that prices will fall. Tighter lending standards may also hurt the housing recovery as people who could previously qualify for a mortgage can't get one now.

About 10 percent of subprime loans were more than 60 days delinquent or in foreclosure as of Dec. 31, up from 5.4 percent in May 2005, according to data compiled by Friedman Billings Ramsey Group Inc. of Arlington, Virginia. The rate was the highest in seven years, according to the report.

`A Lot of Supply'

``Not only do we have a lot of supply in the new home market, the existing homes are sitting much longer on the market,'' said Edie Ousley, a spokeswoman for the Tallahassee, Florida-based Florida Home Builders Association. ``That increases competition for a new home to sell.''

Once a borrower is in default, the foreclosure process, which varies from state to state, can take from five to 18 months, according to the Durham, North Carolina-based Center for Responsible Lending.

The subprime mortgage market surged to $600 billion in 2006 from $120 billion in 2001, John Bancroft, executive editor of Inside Mortgage Finance, a trade publication, based in Bethesda, Maryland. In 2001, subprime accounted for 5.4 percent of the total market to 2006's figure of 20.1 percent, he said.

`Looser Lending Standards'

``Probably the gain in home ownership over the last four, five years, is almost entirely due to looser lending standards,'' said James Fielding, a homebuilding credit analyst at Standard & Poor's in New York.

Fielding said the number of new homes on the market also is understated because when a customer cancels a home contract that house does not go back into the inventory of unsold houses.

``There's a lot more shadow inventory out there,'' Fielding said. ``It's just a quirk of the statistics. They never get recaptured.''

Cancellation rates for new homes have surged to nearly 40 percent and that has boosted the inventory of unsold houses, Margaret Whelan, an analyst at UBS AG, said in a report on March 2.

U.S. homebuilders such as Lennar Corp., Centex Corp. and D.R. Horton Inc. are offering free granite countertops, offering to pay a mortgage for a certain time and other sales incentives to clear out inventory. The heavy level of incentives has cut profit at the builders, whose results are suffering from high cancellation rates and weak demand.

Home Sales Plunge

New home sales plunged 17 percent in 2006 compared with 2005, the biggest decline since 1990, according to the National Association of Home Builders. Existing home sales fell 8.4 percent in 2006 from a record in 2005, according to the National Association of Realtors.

Fielding said the two biggest unknowns for the housing market are how much foreclosure property will come on the market and how stringent lenders get with mortgage lending standards.

Properties in some stage of foreclosure rose 35 percent in December 2006 to 109,652 compared with December 2005, according to RealtyTrac Inc., an Irvine, California-based online marketplace for foreclosure properties.

The lower-priced end of the housing market may feel the effect of the subprime lending problem more than the luxury end, Robert Toll, chief executive officer of luxury builder Toll Brothers Inc., said at a Citigroup conference in New York on March 7.

``We've already seen some impact,'' Toll said. ``It's been minor. I think it will continue to be minor for us but I don't know how great the impact will be at the beginning of the daisy chain.''

Donald Tomnitz, the chief executive officer of D.R. Horton, said in a separate presentation at the same conference that his company would miss its projections for closing this year, and that ``2007 is going to suck, all 12 months of the calendar year.'' D.R. Horton's business is mainly focused on first-time homebuyers and second time homebuyers. The company sells houses starting at $90,000.

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Last Updated: March 9, 2007 00:01 EST