Early payment defaults on subprime residential loans are accelerating, and creditors are being highly critical of whom they do business with, a top Merrill Lynch analyst told investors Feb. 14.Merrill's Kenneth Bruce also said lenders are under intense pressure to tighten their underwriting guidelines, which could lead to a credit crunch for subprime borrowers. During the same conference call, Merrill researcher Kamal Abdullah raised the specter of a subprime "contagion" that could lead to the inability of the "bottom" 25% of all subprime borrowers to get loans. MortgageWire broke the news Feb. 9 that Merrill is making margin calls on nondepository subprime firms that it has been financing. The investment banking firm, like other Street firms, has been forcing lenders to buy back bad loans. Several undercapitalized wholesalers that cannot meet Merrill's demands -- and the demands of other secondary-market loan buyers -- have been forced into bankruptcy, including OwnIt Mortgage and ResMae of California and Mortgage Lenders Network of Connecticut. (For more details, see the Feb. 19 issue of National Mortgage News.)

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry