- The Washington Times - Tuesday, March 13, 2007

Stocks plunged yesterday on signs of weak consumer spending and deepening turmoil in the housing market, with foreclosures hitting a record high and major home lenders such as Countrywide Financial saying rising defaults have forced them to stop providing loans to many homebuyers.

The Dow Jones Industrial Average plummeted 243 points to 12,076 on fears the widening crisis in housing could pull down consumers and the broader economy. The stocks of homebuilders, banks, Wall Street firms and retailers fell broadly, with many wiping out tentative gains for the year.

“No matter which segment you pick, delinquencies are on the rise. Even the most stable sector showed weakness” in a survey of fourth-quarter mortgage delinquencies released yesterday by the Mortgage Bankers Association, said Gina Martin, economist at Wachovia Securities.

“Delinquency rates will likely worsen before they improve,” with the shakiest credit sector already posting record delinquency rates of 15 percent and foreclosures at a record high, she said. “No wonder the equity market is unhappy.”

The report of rising defaults and losses compounded the woes of mortgage lenders. Dozens of subprime mortgage lenders have gone bankrupt and the scandal enveloping one of the largest, New Century Financial Corp., continued to unfold yesterday as the company received a grand jury subpoena in a criminal probe and was delisted from the New York Stock Exchange.

The California company provided loans to homebuyers who needed to stretch their incomes and go into debt to afford high-priced homes. It received funding from some of the biggest names in finance, including Morgan Stanley, Credit Suisse and UBS AG. It is in default on its contracts with those companies and is expected to be forced into bankruptcy.

Countrywide, the nation’s largest mortgage company, said rising losses have forced it to slash lending to less credit-worthy borrowers. It no longer will give loans covering 100 percent of a house’s purchase price to borrowers who do not have prime ratings or documented income. The new restrictions may particularly hurt young people, immigrants and first-time homebuyers.

Countrywide said it expects to survive the shakedown in the home lending industry, which, while painful in the short term, will be healthy in the long run as marginal lenders and borrowers are pushed from the marketplace.

“Aggressive industry underwriting guidelines and lower home price appreciation have resulted in increasing delinquencies and defaults,” said David Sambol, the company’s chief operating officer. “The industry should benefit from more rational underwriting and pricing as excess lending capacity is eliminated.”

But the market has rebuked lenders whether their standards were high or low. Countrywide’s stock has fallen 20 percent this year, while most subprime lenders have lost half or more of their stock value. New Century’s stock plummeted 95 percent before it was delisted.

“Market discipline in this industry is swift and can be severe,” said Doug Duncan, chief economist of the Mortgage Bankers Association. With mortgage lenders going out of business quickly, any further crackdown by regulators or Congress would be overkill, he said.

Federal regulators recently announced their first enforcement actions against banks offering risky loans, and congressional leaders are considering further restrictions on loose lending practices.

Mr. Duncan pointed out that the losses being experienced by lenders already are causing a withdrawal of the riskiest loans from the market and a tightening of credit terms.

Accredited Home Lenders, another major subprime lender, announced yesterday that it is having trouble finding the funding to meet commitments to its backers, including Goldman Sachs Group Inc., Merrill Lynch & Co., Morgan Stanley, Credit Suisse and Lehman Brothers.

“The speed with which this thing has unraveled is really pretty amazing,” said Bose George, an analyst at Keefe Bruyette & Woods.

Contributing to the market drubbing yesterday was a report from the Census Bureau showing a minuscule 0.1 percent rise in retail sales last month following flat sales in January. Housing-related sales on furniture and home-improvement stores fell by 1.7 percent and 1.4 percent, respectively.

While shoppers may have been deterred partly by cold weather, economists said the report indicated that economic growth in the first quarter will be sluggish at best. Consumers propel about 70 percent of economic growth.

Most economists have expected consumers to pull back on spending as they see their wealth from home appreciation level off and dwindle with the collapse of the housing market. Rapidly rising home prices between 2000 and 2005 had helped fuel a consumer spending boom.


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