Subprime snowball

| March 13, 2007

[UPDATED 03/13/07 – 2005 MDT]

Apparently, the stock ripples are worldwide:

A steep sell-off swept through global stock markets on Tuesday as investor confidence was hit by the escalating woes of the US subprime mortgage market and weak US retail sales data.

The S&P 500 ended the day down 2.04 per cent and the Dow Jones Industrial Average tumbled 1.97 per cent, while the yield on the 10-year Treasury note fell below 4.50 per cent as investors sought the safety of government bonds. London’s FTSE 100 closed down 1.16 per cent at 6,161.2 and the FTSE Eurofirst 300 index was down by a similar margin.

“Markets are pricing in a realistic chance that problems in the subprime sector will spill over into the general mortgage market,” said Richard Gilhoolly, senior fixed income strategist at BNP Paribas.

Hat tip to the Drudge Report.  ..bruce..

[Original post]

My able co-blogger, Bruce Henderson, has been on top of the subprime/foreclosure story for some months, but it’s now catching on in the media and, based on the stock market today, among investors as well. Here’s a round-up of the stories just at CNN-Money today:

  • Bonds jump on subprime fear: Bond prices surged Tuesday as the fallout of the subprime lending sector rattled investors’ nerves and tumbling stock markets sent investors looking for refuge, while the dollar fell against the yen and the euro.
  • Scary math: more homes, fewer buyers: “[National] inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent,” [Dean Baker, co-director of the Center for Economic and Policy Research] says. “Now, with the tightening of credit, I don’t see how prices don’t fall another 5, 6 or 7 percent.”
  • Record foreclosures in fourth quarter: The percentage of all outstanding loans that entered the foreclosure process was 0.54, 0.08 percentage points higher than the third quarter and the highest ever recorded in the survey. The previous record was 0.50 in the second quarter of 2002….All major loan types contributed to the increase, but subprimes and FHA loans were up the most.
  • NYSE moves to delist New Century: New Century was listed on the NYSE under the symbol NEW (Charts). The stock has lost about 90 percent of its value since the start of the month on news of growing defaults and problems getting new financing.
  • New Century, Accedited lead subprime plunge: The meltdown among U.S. subprime mortgage lenders broadened Tuesday, as shares of Accredited Home Lenders Holding Co. lost two-thirds of their value and New Century Financial Corp. sank, with investors fearing both would run out of cash.
  • Subprime: the risk to Wall Street: The banks stand to take a double hit. First, they lose if subprime lenders can’t pay back the money they’ve borrowed from Wall Street to bankroll their mortgage business, said Gary Gordon, managing director of research at independent research firm Portales Partners. Second, with the growing problems roiling subprime, there will be fewer of these mortgages issued for the banks to repackage and sell as securities to investors – an area that has become extremely lucrative for Wall Street.
  • Is this the subprime apocalpse? (Or is it just a scary story?): I have lots of information now. Suddenly, the possibility of a housing credit crunch that breaks the economy is much more vivid to me. That doesn’t necessarily mean it is any more likely.

The last story is a welcome reality check, particularly in citing why expert predictions aren’t necessarily any more reliable than those made by reasonably informed individuals. On the other hand, the troubled subprime market will have an impact on both existing homeowners and those seeking to buy their first house, for reasons that Henderson explained a few days ago.

Maybe it’s not such a bad thing that I’m renting right now. 🙂 ..bruce..

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Category: Credit Backlash, Economics, Main

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at bwebster@bfwa.com, or you can follow him on Twitter as @bfwebster.

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