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Another One Bites The Dust... Who's Next?
By Ian Cooper
We’ve been talking a lot about the coming downfall of sub-prime lenders, and for good reason. Especially this week, the love fest for housing and lending stocks is well overdone. The housing market still has not bottomed. And, sub-prime companies aren’t out of the woods yet. Things are so bad that another sub-prime lender, ResMAE Mortgage Corporation just filed for bankruptcy protection.
Worse yet, MortgageDaily.com believes “The sub-prime sector still has another year of tough times ahead.” That’s supported by Countrywide Financial, which says, “We’ve got another eight, nine, 10, 12 months of headwinds. You’re seeing 40 or 50 (sub-prime companies) a day throughout the country going down in one form or another. I expect that to continue throughout the year.”
Note: Sub-prime lenders are the companies that make loans to borrowers with less-than-perfect or poor credit histories. While sub-prime lenders charged higher interest (two or three points higher than prime lenders) as insurance for the higher risk the borrower represented, rising foreclosures have left the sub-prime industry facing substantial fallout risks.
Sub-prime lenders could offer adjustable or teaser rates to those with bad credit. Loans like this made up 23% of the U.S. mortgage market in 2006 as compared to the 8% in 2001, according to Yahoo News. And it’s now a big problem as one in five sub-prime mortgages are now ending in foreclosure, according to the Center for Responsible Lending, as mentioned by Yahoo News.
Times are tough for sub-prime companies, and things could get a lot worse. Goldman Sachs, as quoted by Forbes.com notes, “The outlook for subprime mortgage credit quality remains extremely challenging. This reflects very poor underwriting in late 2006 with the subprime mortgage market now hitting peak levels of early payment defaults and delinquencies in 2007 with peak losses to follow."
Quite honestly, we see no reason to get excited about sub-prime lenders. Heck, we’ve been bearish on these sub-prime stocks before stocks like New Century Financial plunged $14 in two days, which Death Cross Trader readers were well positioned for. The best advice I can give you at this point – Short sub-prime stocks on recent strength. Death Cross Trader readers are currently sitting on double and triple digit gains already from five sub-prime companies. And it’s still not too late to jump in.
Take care,
Ian L. Cooper, Editor, Early Alert Trader