Survey finds high level of loan failure

WASHINGTON - A third of home loans originated by mortgage brokers failed to close in August as investors shied away from riskier borrowers, a new survey says.

The survey of 1,700 mortgage brokers sponsored by trade publication Inside Mortgage Finance comes as numerous lenders that catered to subprime borrowers with weak credit close down and lenders back away from riskier lending practices common in recent years.

That has led to many borrowers being stuck without a loan as they prepare to settle.

"There's a problem with funding commitments not being honored," by lenders, said Thomas Popik, who designed the survey for Washington-based research firm Campbell Communications.

Three years ago, Popik said, a survey of real estate agents found that only 4 percent of transactions failed to close on average.

The survey also found that some homebuyers backed away from deals last month. Some may be waiting to see if market improves, while some sales may fall apart because sellers are unable to get financing for their new home, Popik said, noting that sales agreements often are contingent on buyers selling their current home.

The survey also found that nearly half of borrowers with adjustable rate mortgages were not able to refinance their loans. That's a major concern of policymakers as an estimated that 2.5 million mortgages given to borrowers with weak credit will reset at higher rates by the end of next year, according to the Federal Deposit Insurance Corp.

Mortgage brokers account for about one-third of total mortgage originations, and have originated a larger share of loans to riskier borrowers, so the percentage of failed loans in the entire market may be smaller.

Nevertheless, the results provide another indication of how the housing market's troubles are continuing.

Total subprime lending was down more than 50 percent in the first half of the year as lenders pulled back from risky loans. Countrywide Financial Corp. was the top subprime lender, followed by Citigroup Inc., HSBC Holdings PLC, Merrill Lynch & Co. subsidiary First Franklin Financial Corp. and Wells Fargo & Co, according to Inside Mortgage Finance.

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