Foreclosure Not Just for Consumers: Mortgage Lenders Face Defaults from Homebuilders

For those readers who think consumers are the only people having trouble paying their mortgages, consider homebuilders, Toll Brothers, Lennar, and KB Homes. Recently, two of their major Las Vegas apartment projects received delinquency notices, opening the door to potential foreclosure.

Lending Institutions Face High Rates of Foreclosure

Beyond John Q. Public, mortgage companies face defaults from all manner of borrower. There is a saying that goes around the banking world: “When you owe the bank $100,000 and cannot pay, you are in big trouble. When you owe the bank $100,000,000 and you cannot pay, the bank is in big trouble.” Based on all the news in today’s market, there are just too many individuals facing tough financial circumstances for there not to be a real fear for banks.

Mortgage lenders experienced their first shake out in the middle of 2007, with hundreds of small mortgage lenders and banks closing their doors. While many larger banks took significant hits to their bottom line, many felt comfortable that time would heal their wounds. It turns out time was not only not their friend, but their mortal enemy. The financial markets have deteriorated significantly, and now even the largest firms have to take a serious look at how they can keep their doors open through one of the roughest financing periods in recent history.

Bear Stearns and Investment Banking Fallout

Interestingly, the first major investment bank to spark the subprime mortgage crisis becomes the first investment bank to narrowly escape bankruptcy with a last minute deep discount sell. Bear Stearns, an industry leader in leveraged financing products, escaped Chapter 11 by the skin of its teeth with a last minute sell to JP Morgan.

While many will speculate as to the cause of the bankruptcy, it can be surmised that the subprime mortgage market and the general housing market woes played a part in it. Based on the speed at which the housing market has turned sour, many other general and investment banks are on Chapter 11 watch.

What about the Consumer?

This fallout will bring mixed news to borrowers. On the positive side mortgage rates will continue to decline in the near term. With the Federal Reserve expected to decrease rates another 100 basis points, mortgage rates will continue to remain low.

On the negative side, it will become much harder to qualify for a loan. With defaults up across the board and many banks short on cash, lenders have gone on the defensive. Not only are they raising fees for their loan products, but they are also raising their criteria to qualify. Expect to put more money down, while bringing a higher credit score to the table to get the next home loan.