Central "Subprime" Valley

From the Wall Street Journal:

Fears about defaults are slowing the gusher of investor funds going to riskier segments of the mortgage market. That means less money available for "subprime" loans to riskier borrowers, forcing lenders to focus more on borrowers who can afford down payments and have well documented finances. With fewer lower-income Americans able to buy homes, downward pressure on prices will probably increase.
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In a recent report, Keefe, Bruyette & Woods analyst Frederick Cannon said "constraints on lending to first-time home buyers are likely to prolong the housing downturn" by limiting sales of entry-level homes, making it tougher for the owners of those homes to trade up.

Nationwide, 16 percent of the home-purchase loans issued in the first half of 2006 were subprime, the Mortgage Bankers Association says. The impact of the tightening likely will be bigger in markets that were more dependent on subprime loans. Such mortgages accounted for more than one-third of such loans in some California markets, including Stockton-Lodi, Modesto and Merced; in Richmond-Petersburg, Va.; and in Miami, according to First American LoanPerformance.

Nearly two dozen subprime lenders have been acquired or shut down in the past year, "with another dozen on the ailing' list," a recent Credit Suisse Group report says. Cumulative losses on subprime loans could exceed $10 billion over the next two years, the report says.

Reporting a loss for the most recent quarter, subprime lender NovaStar Financial Inc., said last week that it had raised the minimum credit score needed for loans with low down payments, among other tightening steps.

"We're probably reverting back to guidelines that were in place" four years ago, NovaStar President Lance Anderson says. The new guidelines wouldn't have allowed as many as 25 percent of last year's loans without more documentation or bigger down payments, he adds.

From the Merced Sun-Star:

Merced's median home price fell to $325,000, down from $363,000 during the same period in 2005. The median price peaked at $376,000 in the second quarter of 2006, according to NAHB statistics.

Merced County Association of Realtors President Scott Oliver called the price drop a sign that sellers of older houses are becoming more realistic about the competition they face from new housing inventory.

"The sellers have gotten the message now that they have prices a little high," Oliver said. "(They) fought reducing their prices for about four to six months."

As new subdivisions remain flooded with empty inventory, builders are offering more and more incentives to sell houses, Oliver said...In response, sellers of "resale units" -- houses that have been on the market before -- are finally lowering their asking prices, he said.