Sub Prime Lenders Stock Market Woes

The stock market fell by more than 240 points on March 13 as concerns about the health of the US economy increase.

The concerns are being fueled by a possible meltdown in the US sub prime lenders sector which would have serious implications for the entire US economic outlook. Sub prime leaders are those lending institutions that make housing loans to borrowers with less than stellar credit ratings. Often far less than stellar.

To entice sub prime borrowers to take on large loans from sub prime lenders introductory low rates were often offered, which kept payments artificially low for the first few years of the loan. Most of these now troubled loans are ARMs, adjustable rate mortgages, which means that as market interest rates rise mortgage loan rates increase and therefore borrower monthly house payments increase.

As many of the “introductory” low rates of these ARM’s have now expired and interest rates have also increased from the low, low, levels of two and three years ago, borrowers are being hit doubly hard with sharp increases in their monthly loan payments. A payment of say $800 a month that the borrower could manage at the beginning of the loan has at, say $1,600 a month, become an impossible burden.

Only last week HSBC, Hong Kong Shanghai Banking Corporation, announced it was setting aside much larger sums for loan loss reserves as its US portfolio of sub prime loans turns sour. HSBC began acquiring large amounts of US sub prime loans in 2005 and quickly became one of the markets largest participants.

Now American sub prime lenders are revealing that they have their own problems. Delinquencies that are over 60 days are sharply increasing. With a slower housing market borrowers can’t count on a quick sale at a price great enough to pay off the mortgage as a way out. As home prices fall home owners go “under water” , which means that they own more on the mortgage than the home is worth.

Under such conditions under water homeowners may choose to stop making loan payments and see how long it takes the lender to complete foreclosure proceedings. Thus overall conditions in the housing market can deteriorate quickly.

A meltdown in the US sub prime market can contribute to a further slowing in the overall US housing market as a large number of housing units are foreclosed or are placed on the market in an effort to avoid foreclosure.

A drastic slowdown in the housing market has grave implications for the health of the entire US economy as in the sharply raising housing market of the past six years large numbers of homeowners have used their increased home equity to purchase all sorts of consumer goods, from SUV’s, to new kitchens, to flat screen hi definition TV’s, to expensive vacations. Some homeowners have used their access to home equity lines of credit as ATM machines.

The stock market is beginning to sense that the true state of the US economy may not be so healthy after all. A serious decline in the stock market, lead by a collapse in the sub prime lending market, followed by a sharp downturn in the overall economy, would have far reaching implications in the run up to the 2008 US elections.

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