Lenders growing more wary of risk

NEW YORK -- Downward momentum in the housing market is leading some of America's biggest mortgage lenders to adapt business plans for even softer demand. They are launching new cost cuts and risk-reduction strategies that suggest growing concern for the $9.5 trillion home mortgage industry.

Slowing sales have pushed inventories up 39 percent in the past year and set home prices on the path of decline, some analysts said. Builders of new homes, meantime, reported the lowest confidence about their prospects in June than anytime else in the past 14 years.

``I've never seen a soft landing in 53 years, so we have a ways to go before this levels out," Countrywide chief executive Angelo Mozilo said. ``I have to prepare the company for the worst that can happen."

At New Century, one of the nation's biggest subprime lenders, chief executive Brad Morrice said the company has tightened some credit requirements as it puts ``more thought into loans you want to make or don't want to make."

Countrywide, the nation's biggest mortgage lender, plans to cut as much as $500 million in costs in the next year.

Ameriquest Mortgage Co., the biggest subprime lender, earlier this year said it will cut more than a third of its 11,000 workers. Washington Mutual Inc. has also said it would cut mortgage-related jobs.

While lenders tighten credit requirements to reduce expected defaults, they are taking new risks elsewhere.

Countrywide, New Century, and Thornburg Mortgage Inc. are wading deeper into more lucrative payment-option adjustable-rate mortgages, products increasing in popularity since borrowers can defer all principal and portion of interest for a period. The lenders conceded the loans have unknown risks as their payments reset higher, but for now are relying on data including credit scores to manage their default exposure.

So far, house prices have not shown an overall decline. But as prices languish or begin to slide, homeowners relying on equity gains to make payments or subsidize other liabilities may begin to default on their loans.

``The housing correction has a long way still to run," Ian Shepherdson, chief US economist at High Frequency Economics in Valhalla, N.Y., wrote in a note to clients.

National Association of Realtors data show the inventory of homes for sale climbed to a 6.8-month supply in June, from 4.4 months a year earlier. Prices rose 1.1 percent in the year, the least since 1995.

Still, many economists are anticipating a soft landing. Erosion in the market so far is just a ``mid-cycle correction," said David Seiders of the NAHB. As long as rates do not rise much more and the economy remains strong enough to support jobs, the market will recover, he said.

The rate on a 30-year fixed mortgage last week averaged 6.8 percent, 1.07 percentage points more than a year earlier and the highest since May 2002.

US interest-rate futures show traders see a 43 percent chance the Fed will raise its target short-term rate an 18th consecutive time at its Aug. 8 meeting.

``We are very interested in what the Fed will do because we are testing the elasticity of borrower demand," said Morrice, of New Century. ``Not that there's a cliff, but with every rate increase you lose a few more borrowers."