Readers suggested a topic about the changes in the subprime lending world this past week. "My topic suggestion, with all the bad news in the sub-prime sector will we ever see a return to more conventional lending with the old school lending practices or are these garbage liar no doc, no money down things here to stay?"

One said, "I think liar loans etc. are here to stay, because there is no way to support current home prices without them. At least in Europe, with a return to lending standards of 15 years ago, the housing market would crater."

A reply, "That’s not what will determine liar loan viability. Investor appetite for these loans, and the price they’re willing to pay, will determine their staying power and usage. Housing prices will be the secondary effect, one way or the other."

One looked at the secondary market. "Take a look at the MBS bonds. The MBS buyers don’t care if you lose $50k on your house. They do care if they lose $50k. I expect an overcorrection. We’re already seeing the sub-primes demanding 5% and 10% down payments and taking the hit in the turn rate."

One pointed to the industry panic. "The government’s War on Subprime continues, and the kingpins are running for the hills. No kingpins, no local dealers, no new future subprime debt addicts."

From Bloomberg. "Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected. 'It's kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,' said Brian Horey, general partner at Aurelian Partners, which has sold short shares of New Century. 'If you could fog a mirror, you could get a loan.'"

The Orange County Register. "Stock of Irvine's New Century Financial lost more than one-third of its value Thursday, as investors digested news that it will restate past earnings, make fewer loans this year and report a fourth-quarter loss. Analyst Richard Eckert said investors are upset the company will restate earnings for the first three quarters of last year."

"'Restating earnings is like telling your investors you lied to them,' Eckert said."

"Standard & Poor's said Friday that it downgraded its credit rating of Irvine's New Century Financial Corp. and might downgrade it further. The agency cited New Century's increasing buy backs of bad loans from investors and the possibility that the company breached certain agreements with creditors, 'which would pose a liquidity challenge.'"

"Roy Jacobs & Associates announces that it has filed a class action lawsuit on behalf of purchasers of the common stock and other securities of New Century Financial Corp."

"During the Class Period defendants knew but failed to reveal that New Century was being forced to buy-back substantially more loans than originally had been expected. Despite knowing of the surge in forced loan repurchases, the defendants failed to properly account for them. In addition, the Company failed to write-down the value of the loans reacquired, even though these troubled loans had materially declined in value."

From Brokers Universe. "In some quarters it's being called a liquidity crisis, the likes that haven't been seen in the subprime sector since 1998. On Friday, National Mortgage News Online reported that Merrill Lynch was making margin calls on certain warehouse customers, asking these non-depositories for more capital."

"We're also told that some Wall Street firms are getting ready to trim back their warehouse lending operations. Which Wall Street firm will be the first to run screaming from the industry, shouting, 'What have I done? What have I done?'"

"Lenders Direct CEO Mike McQuiggan had this to say about the subprime carnage: 'I see our industry in true recession right now. It's touching everybody.' LD closed its wholesale platform on Thursday."

"One source who's been in the industry for 30 years told us that loan buybacks could affect, at worst, 10% of subprime production this year. If B&C lenders fund $600 billion, that would be $60 billion."

The Street.com. "The recalcitrant agencies, Moody's, Fitch and Standard & Poor's, have quietly abetted (blessed) the mushrooming of very aggressive subprime lending that has allowed the Wall Street firms selling these mortgage products to prosper."

"This week's Grants Interest Rate Observer calls attention to a 13-month-old, $350 million asset-backed pool of mortgages, MABS 2006-FRE1. Foreclosures now stand at 9%, delinquencies at 10.5% and real estate owned at 3.5%."

"In other words, about 23% of the loans are problematic, and neither Fitch nor S&P has downgraded the issue. No doubt investors in MABS 2006-FRE1 (hedge funds, brokerages, institutions, etc.) mark the issuance to par (since it has not been downgraded)."

"Among other mortgage lenders, Fremont General Corp. fell 3 percent, Accredited Home Lenders Holding Co. declined 5.3 percent and American Home Mortgage Investment Corp. dropped 5.4 percent."

"'It's not that they didn't understand the risks,' said interest rate strategist Kevin Jackson. 'These guys saw the opportunity to originate products that were more risky for more return, and now it's backfiring on them.'"

From Inman News. "HSBC began to discover its losses -- began -- from playing on the American subprime freeway. This is the first indication of trouble in piggyback second mortgages. Until now, the Street has confessed only to trouble with subprime loans, and only those made in 2006, saying terms offered then had become too easy."

"Nice try. 2006 was just the first year with flattening home prices. Loans made in earlier years had no tougher underwriting; they were merely protected by rising home prices. Not for long."

"Appearing soon: gradual but horrifying knowledge that 'A'-quality first mortgages were infected by the illusion of the Street's risk distribution. If in 1999 we sent to any human FHA underwriter a loan application with no borrower savings, a gift of down payment, $10,000 in credit-card debt, stable employment, decent credit, rent history at $800, and a proposed new payment of $1,500, that loan would have been declined every time."

"Since 2001, that loan and all of its Fannie and Freddie and private MBS cousins have been approved by Street-calibrated software. Approved every time."

The LA Times. "As much as $800 billion of adjustable-rate mortgages will reset to higher payments this year, and 1 of 11 home loans is both adjustable and sub-prime, according to the Mortgage Bankers Assn."

"'There could be a good chunk of borrowers with nowhere to go to get loans,' said industry analyst Zach Gast. 'It means a lot of people are going to lose their homes.'"

Thw Wall Street Journal. "Antonio Papa, a construction worker, took out an option ARM with a 1 percent introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6 percent in September 2005 and has since climbed to 7.5 percent."

"'I was looking to refinance to have more stability,' he says. He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months' of interest if he refinances within the first three years."

"Michelle Thompson in North Glenn, Colo., pulled out $30,000 when she refinanced her mortgage last year. She would like to refinance again, but when she went to apply for a new loan, she discovered that her mortgage debt exceeded the home's value."

"Charlotte Keyes in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10%, Ms. Keyes is looking to refinance. She owes more than the home is worth."

"With ARMs, 'the tag line you always hear...is you can refinance with no problem,' says A.W. Pickel, a mortgage banker in Overland Park, Kan. 'But it is a problem.' The appraisal for Ms. Keyes's last loan was inflated, he adds."