Why are lenders still closing risky loans?

[bobola]

This is a bit scary;


"April 10 2007:
NEW YORK (Money) -- Option ARMs remain an option. Despite problems in the mortgage market, brokers say lenders are still willing to make risky loans - including those that allow borrowers to make monthly payments that don't even cover the interest (so-called "option ARMs").

Also still widely available are "no-doc" loans, which require no income verification, and mortgages with no downpayment.

All of those loans fall into the so-called Alternative-A or Alt-A mortgage market, which caters to people with average credit scores who want riskier mortgages and has been one of the fastest growing segments of the home loan business in recent years.

Jim Moore, a mortgage broker in Grand Rapids, Michigan who also writes about mortgages for Miamibeach411.com, said he recently completed a $3 million refinance on a second home for a borrower who was out of work. "This wasn't even a no-documentation loan," says Moore. "This was a no-income loan, and the lender knew it."

Other brokers say they haven't had to turn away customers, either. George Duartes, who is the president of Fremont, Calif.-based Horizon Financial Associates, says his firm continues to be able to find banks who want to lend to the 30 percent of his clients who fall into the Alt-A category. "So far those clients have been able to get the loans they wanted," said Duartes."

[jk]

Re: Why are lenders still closing risky loans?

the lender pockets fees and passes on the risk. the real question is who is buying those loans? whose portfolios do they end up in?

[SeanO]

Re: Why are lenders still closing risky loans?

the lender pockets fees and passes on the risk. the real question is who is buying those loans? whose portfolios do they end up in?

It appears there are those that think the whole problem is grossly overstated and that the risks are still manageable. They are supported by studies like this one: http://www.firstamres.com/spr07_cagan.jsp, that suggests losses will only be about 1% of total originations.

[grapejelly]

Re: Why are lenders still closing risky loans?

it isn't the current losses that will matter. It's the effect of contracting mortgage credit on the housing market. We would expect credit standards are rising rather quickly, thus creating a wave of failed purchases and re-fis.

Globally, there still doesn't seem to be much of an increase in risk premiums, so I assume there is still a market for these loans.

I imagine that these subprime companies are supported by large warehouse lines and they can continue making loans, in fact need to continue making loans to fund their overhead.