According to a recent poll by the National Association of Business Economics (NABE) in the US, the subprime mortgage industry is the number one risk facing financial markets at the moment. Hedge funds are mere also-rans in second place.
Due to a recent rise in defaulted loans and delinquencies by subprime borrowers, several subprime mortgage lenders have either lowered their company’s financial activity, or completely closed down, RiskCenter.com reported, and the sector has come under increasing scrutiny. Last week, shares in NovaStar Financial, a subprime lender, sank 42 per cent after it said it might generate no taxable income over the next five years.
But NABE president Carl Tannenbaum said he did not anticipate widespread financial stress despite the sector’s current poor performance.”The outlook for consumer spending, which is the one that might be hit the highest by mortgage delinquencies and defaults, was actually revised upward,” Tannenbaum said.
Not everyone is convinced. Peter Cohan, a management consultant and venture capitalist, paints a much gloomier picture over at AOL’s Bloggingstocks.com.
“I believe the subprime mortgage collapse could contribute to widespread credit losses among companies that provide short-term funding to the subprime lenders and among the pension funds, insurance companies, and hedge funds that hold the securities backed by the growing pile of bad loans,” Cohan wrote. “These losses will lead to tighter lending standards which will make capital scarcer and contribute to a credit crunch which could crimp economic growth.”
US politicians and financial regulators are keeping a close watch on the sector. Next week a subcommittee of the House Financial Services Committee will meet to examine possible predatory lending practices. “The trend of increased foreclosures is certainly troubling, and it is important to understand the potential root causes,” Rep. Carolyn Maloney said in a press release [via MarketWatch]. “Clearly, not all subprime or exotic lending is destructive, but abusive practices do exist and congressional oversight is needed.”