Lending troubles worry markets

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Troubles in the home lending industry sent tremors through Wall Street markets again yesterday as federal regulators cracked down on two top subprime lenders and rising defaults threatened major banks and brokers with growing losses.

The Federal Deposit Insurance Corp. ordered Fremont General Corp. to stop providing loans to borrowers who do not qualify for mortgages once their initially low payments are increased to reflect market interest rates, the lender said Friday in announcing that it is exiting the subprime lending business.

Meanwhile, HSBC Holdings, Europe's biggest bank, said it experienced $10.6 billion in losses mostly on mortgages in the United States last year, and expects more losses this year as the interest rates on mortgages adjust upward and housing prices continue to decline.

Chief Executive Officer Michael Geoghegan stressed that the megabank's troubles are not limited to the riskiest or subprime loan sector.

"This is not trailer park lending," he said, noting that a typical HSBC customer has a household income of $83,000 and a home worth $190,000. "This is Main Street America."

HSBC in recent years purchased many of the "piggyback loans" that enable borrowers to buy houses with 100 percent financing -- usually with an 80 percent first mortgage and 20 percent second, or "piggyback," loan. The second loans are the most prone to go into default when interest rates rise and house prices fall.

"This is not a stable market," Mr. Geoghegan said. "There are ups and downs, and we are in a downturn."

The "major setback" in HSBC's mortgage unit has forced it to stop offering second loans and riskier mortgages. HSBC's withdrawal from the market is part of a wider evaporation of credit, especially for first-time and minority buyers who often have the shakiest credit standing.

More than 20 mortgage companies have closed in the United States, declared bankruptcy or sought buyers since the start of 2006. The turmoil has roiled the stock market for weeks amid fears of a widening credit crunch.

Fremont's exit from the home lending business comes as the woes of another top subprime lender, New Century Financial Corp., deepened after it disclosed the Securities and Exchange Commission and a U.S. district attorney in central California are investigating its trading and accounting practices after an announcement last month that it would restate financial results because of mounting mortgage defaults it had not anticipated.

Shares of New Century plunged yesterday $10.09, or 69 percent, to $4.56 on the New York Stock Exchange.

Concerns of a meltdown spread to major banks that back New Century, including Morgan Stanley, which had a 5.5 percent stake in New Century, State Street Corp., with a 3.8 percent stake, and Citigroup Inc., with a 3.5 percent stake.

The FDIC's action against Fremont appears to be the first to target a bank under regulatory guidance that five federal banking agencies issued in late 2005 requiring lenders to consider the ability of borrowers to repay loans once their low "teaser," or introductory, interest rates expire.

Mortgage brokers say they had been routinely approving loans for buyers who qualified only under artificially low initial interest rates that are subsidized by the fees borrowers pay and usually roll into the loan.

In another sign the mortgage crunch is spreading, Lehman Brothers Holdings Inc. announced yesterday it is cutting the ratings of Countrywide Financial Corp., the largest mortgage lender, and other prime lenders as defaults surge.

"Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages," analyst Bruce Harting said. "The rapidity, breadth and depth of the subprime sector meltdown has been extraordinary, even in the context of an environment in which most industry observers felt that major problems in the subprime space were inevitable and overdue."

• This article is based in part on wire service reports.