Countrywide, the nation’s largest mortgage lender, yesterday said falling home prices and deteriorating market conditions prompted increased defaults and losses on prime home-equity loans in the spring — one of the clearest signs yet that the credit crunch is spreading beyond subprime and infecting average borrowers.
The news sent the dollar plunging to new lows against the euro and helped spur a 226-point drop in the Dow Jones Industrial Average.
The surge in defaults is causing interest rates to climb for borrowers most at risk of not being able to pay their loans when the monthly payments rise to cover deferred principal and interest payments. Weak corporate borrowers also are at risk in what Moody’s Investors Service yesterday called an “inevitable” liquidity crunch.
“We are experiencing home-price depreciation almost like never before, with the exception of the Great Depression,” said Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo, noting that half of American cities are experiencing declines in home prices, which are making it hard or impossible for consumers to refinance unpayable loans or sell their homes to get out from under the debt.
Many of the home-equity loans going into default were so-called “piggyback” loans that home buyers take on to avoid paying mortgage insurance when they cannot make 20 percent down payments. The fall in house prices of as much as 20 percent in some areas jeopardizes such borrowers since the loans they are paying may exceed the value of their homes.
“We expect difficult housing and mortgage market conditions to persist” through next year, Mr. Mozilo said, with further drops in home values and climbing defaults as consumers find no way out of their financial problems.
To pare its losses, he said Countrywide has stopped providing second mortgages and adjustable rate loans for subprime borrowers, and is severely tightening standards for home investors and prime borrowers who take on riskier loans.
Overdue payments cut Countrywide’s second-quarter profits by $388 million and sent its stock tumbling 12 percent to $30.05 yesterday. The gloomy news, combined with flat earnings at American Express and DuPont, which also were hit by deteriorating credit and declining paint and countertop sales related to housing, sent new shivers through financial markets, which have been rocked all year by news of the deepening housing and mortgage crisis.
The Dow’s drop, less than a week after hitting 14,000 for the first time, was the biggest since a 242-point plunge on March 13 when the markets were shaken by worries about spreading subprime problems. The worries particularly have shaken confidence among foreign investors, sending the dollar to consecutive record lows against the euro and 26-year lows against the British pound.
The reverberations are being felt as far away as New Zealand, where markets fell yesterday out of concern that the widening housing collapse is undermining the U.S. economy. Much of the money used to make U.S. mortgage loans during the housing boom came from overseas as foreign investors poured money into what they thought was a sound housing market.
“More talk of credit-related losses in the U.S. market is weighing on risk aversion” around the world and is causing investors everywhere to reconsider the easy money loans they made in the past, said Danica Hampton, currency strategist at Bank of New Zealand Ltd.
Mike Shedlock, author of Mish’s Global Economic Trend Analysis, said he expects the fallout from the early 2000s housing bubble to be the worst ever experienced in the United States, but not quite as bad as the Japanese real estate bubble, which took 17 years to hit bottom after it peaked in 1990.
“I suspect it will take at least five to seven years here, and five is very optimistic. It could easily take 10 years or more” before house prices fall enough to start rising again, he said. Only the Federal Reserve has the power to significantly ease the pain by slashing interest rates, he said. The central bank has said it is watching the housing implosion, but thinks it will be limited and is not currently inclined to lower rates.
Mr. Shedlock noted that a vicious cycle is developing from rising foreclosures that could prolong and worsen the housing bust and precipitate a recession, especially in states like California and Florida that experienced the biggest bubbles.
“Credit standards are getting tighter,” he said. “Some will be unable to refinance because they are too far under water. When banks take back property in foreclosures, they will dump those houses on the market. That will further depress prices.”