Subprime Lenders mess
03/07/07: The latest concern on Wall St. relates to the housing sector, specifically the subprime lenders. From 2000-2005, the real estate market was hot. Everyone who owned real estate saw the value of their homes appreciate at an unprecedented level. Long term interest rate was at is lowest since the 1960s which made it possible for more homebuyers to borrow even if their credit is not as strong. As a result, this drove up home prices faster than most local economy can support. In order to remain competitive, lender had to lower their qualifications to attract customers. Has this lenient practices finally caught up to the industry?
Companies that specialized in providing subprime mortgages are now facing the scrutiny of the government and sparking fear on Wall Street. On Monday, New Century Financial (NEW) tanked more than 50% after the company said the Justice Department was investigating its accounting. Other subprime lenders also fell in tandem. NovaStar (NFI), Fremont General (FMT), and Accredited Home Lenders (LEND) all took a big hit in recent days (By the way, subprime lenders targets homebuyers with poor credit).
The question here is since these stocks are way down, is it a good idea to buy? In our view, this could be just a glimpse of the overall problem and the worse might still yet to surface. In the past few years, the mortgage industry had been complacent. Caught in the housing madness, a lot of lenders offered unconventional loans with terms to risky borrowers to help keep the housing market afloat. In some respect, we are not surprise this industry is being investigated. If New Century Financial is cooking their books, others within their industry could be doing the same. For now, we are staying away from the subprime lenders stocks even though they are cheap.
The concern over the subprime lenders have also pulled down good stocks such as Countrywide Financials (CFC) and Washington Mutual (WM) and HSBC. These companies are simply a victim of being in the mortgage industry. Therefore, we would buy more of CFC, WM and HSBC if the opportunity allows. Unlike the subprime lenders, these companies will survive the current storm and should emerge stronger.
