Many warned a couple of months ago that the next credit crisis would have to do with underdisclosed debt held by banks. Additionally, the subprime mortgage debt packaged by many Wall Street banks in securities with other types of debt is also causing problems that are coming to the surface in a big way right now. Bloomberg reports that New York and Connecticut are both investigating Wall Street banks for their practices:

Defaults on subprime loans have led to bankruptcies of lenders of such mortgages, such as New Century Financial Corp., roiling stock markets. Banks that packaged subprime loans as investments, such as Citigroup Inc. and Bank of America Corp., may have to write down billions of dollars when they report their next earnings, analysts said. New York and Connecticut are among at least a handful of states investigating the mortgage industry as foreclosures have risen nationwide. Blumenthal said his office was cooperating with New York Attorney General Andrew Cuomo “as we always do when our investigations have similar interests.”

Last summer’s subprime lending crash is sending ripples through the economy in a way that is likely to be felt at least through the end of 2008, if not beyond. Numerous attempts to instill “confidence” in the economy and in the stock market have failed, since “confidence” does nothing to actually address underlying problems.

Downsizing and bankruptcies affect jobs, and losses affect investors (including “regular folks” whose investments mainly consist of holdings in retirement accounts). Additionally, a slowdown in the housing market and the home equity loan business affects home improvement stores and stores that cater to household items.

Will current efforts address these problems? It is clear that a new outlook on debt is needed in order for the economy to recover.

When applying for a home mortgage loan, one of the most important items is your credit score. Mortgage lenders use your credit score to determine not only whether you get the loan, but also to decide what mortgage interest and other terms will accompany it.

Check your credit report

Before applying for a home mortgage loan, it is a good idea to check your credit report. You want to fix mistakes on your credit report, as well as get an idea of whether you will need to take steps to improve your credit score. Be aware that in the currency lending climate, you will likely need a higher credit score. Many subprime loans (they are still being offered in some places) require at least a 670, and if you want a good mortgage interest rate, you will need at least a 700. Some lenders want even higher scores. Requirements vary, so ask around.

Stay away from more debt

With economy likely headed for a recession, if you are not careful, you might find it more difficult to make debt payments. Now is the time for you to do your best to get things in order and re-do your finances to avoid more debt. Debt (and inability to pay it) can cause a great plunge to your credit score. It may be a buyer’s market right now, but you can’t take advantage of it if your credit score is ruined.

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check credit report, recession, improve credit score

When it comes to the U.S. in terms of mortgage lending, no one beats Countrywide. It is the largest lender. Indeed, it was also the largest subprime mortgage lender. And that meant that the subprime lending crash hit the company hard. Citibank and other financial sector companies have been bailed out be cash infusions, but Countrywide is still waiting.

Bloomberg reports that Countrywide will see more pressure — not less — as this new year progresses:

“It appears that the housing trends in 2008 will look a lot like 2007, so Countrywide will remain under a lot of stress,” said Tom Atteberry, a money manager in Los Angeles at First Pacific Advisors LLC, in an interview yesterday. “What they are left with is a pretty low-margin business.”

Indeed, rumors began floating recently that Countrywide plans to file for bankruptcy. Countrywide is combating these rumors fiercely. The mortgage lender insists that bankruptcy is not in its immediate future, even at it reports that last months foreclosures and late payments rose to the highest level in more than five years.

CNN Money reports on the rise in foreclosures for the third quarter of 2007:

The Mortgage Bankers Association reported that 0.78 percent of mortgages entered the foreclosure process in the three months ended Sept. 30. That figure is up from 0.65 percent in the second quarter - the previous record high - and more than double the 0.32 percent rate a year earlier.

December was even worse. And, as the economy slows, possibly moving into a recession, concerns of further problems are likely to surface. After all, economic difficulties will hit consumers, making it more difficult to make payments.

Mortgage lending is facing serious problems right now, with reluctance to grant home mortgage loans apparent by many providers. Additionally, consumers are wary. The subprime mortgage market appears to be in retreat as well — almost completely disappearing.

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subprime mortgage market, Countrywide bankruptcy, Citibank bailout