2007 July 31 Tuesday
Mortgage Problems Spreading

Months ago the spin on the housing market was that only subprime mortgages were in trouble and a turn-around was just around the corner. Yet another mortgage lender goes insolvent.

In a move that sent shockwaves through the financial markets and left investors millions of dollars poorer, Melville-based American Home Mortgage Investment Corp. announced yesterday that it lacked the money to pay its lenders or the credit lines to pay its borrowers.

It was the largest mortgage bank to face bankruptcy in a year of bad news for the mortgage industry, and the news that problems were not confined to high-risk lenders helped turn an early stock rally into a 147-point drop for the Dow Jones industrial average.

American Home lost a whole order of magnitude in value.

In corporate news, American Home fell $9.42, or 90 percent, to $1.05 following disclosure of its difficulties.

Moody's Investors Service tightened its standards Tuesday for so-called Alt-A loans, which are above supbrime but below prime loans in terms of credit quality. The move could stir concerns that credit problems are spreading beyond subprime loans to a higher quality of borrower.

Mortgage hedge funds have been collapsing.

After the market closed, the investment bank Bear Stearns, which this summer had to shut down two hedge funds that had made bad bets in the subprime mortgage market, said that a third fund had suffered losses in July and that redemption requests had been suspended.

Unlike the other two hedge funds, the Bear Stearns Asset-Backed Securities Fund, with $850 million in assets, had only a small fraction of its investments less than 1 percent in subprime mortgages, and the fund had not borrowed money to try to juice up returns, according to a person briefed on the fund but not authorized to speak for attribution.

Mortgage holders with higher credit ratings are also getting into financial trouble.

Countrywide Financial, which originates 17 percent of U.S. mortgages, reported a sharp drop in second-quarter profit, slashed its earnings forecast and signaled that its woes reflect that credit problems are spreading to a wider population of borrowers than once believed.

Countrywide Financial Chief Executive Angelo Mozilo is reported to have uttered this shocker in a conference call:

"Company is seeing home price depreciation at levels not seen since the Great Depression."

I hope the bursting housing bubble combined with Peak Oil don't throw the world economy into a depression.

Countrywide's growth in delinquent loans suggests a deepening housing financial problem.

Wall Street was shocked to hear that the percentage of Countrywide customers with good credit who were delinquent on their loans rose to 4.6 percent for the quarter, up from less than 2 percent a year ago.

We are reaching the end of "Flip This House"/"Flip That House" mania.

If you are a renter now's the time to start saving for a down payment. Get ready for the bargains.

Share |      By Randall Parker at 2007 July 31 11:19 PM  Economics Housing


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