Suddenly, the US housing downturn has gone from being a question of housing starts, permits and sales and the narrow impact on suppliers and operators, to having a widening impact on the US financial system.
The earnings downgrade last Wednesday by the HSBC, the world’s fourth largest bank, because of problems with mortgage lending in its US Household group, has triggered a rush of questions about the mortgage industry generally, especially the funding of home and apartment purchases by less than prime borrowers (what we call low doc or no doc lending in Australia).
It rattled the sector Thursday and again Friday and helped push the US market lower overall.
Brokers directly blamed rising worries about mortgage defaults and their impact on banks and property owners for giving Wall Street its worst week’s trading this year.
Not helping was US oil prices touching $US60 a barrel in futures trading and warnings about the dangers of inflation from two senior Fed members.
Citigroup Inc., the biggest financial services company, suffered its biggest fall in seven months.
The fall in financial stocks, for the second day in a row, was assisted by the warning from Federal Reserve Bank of St. Louis President William Poole who noted that defaults in loans to risky borrowers and signaled interest rates may rise.
Stocks in US homebuilders fell for five straight days, their biggest weekly decline since August.
Here in Australia the news won’t help Rinker Group in its attempts to fight off an unwanted takeover offer from Cemex of Mexico. Likewise Boral, which last week blamed the US housing downturn for partly causing a 15 per cent drop in earnings in the December half (and for the rest of the year), won’t be happy with the sharp drop off in sentiment. James Hardie, which gets most of its earnings from the US housing market, is another who won’t appreciate the change in sentiment.
US analysts now say credit quality is a problem: and that’s what analysts will now be looking for among the myriad lenders and other intermediaries servicing the financing side of the US housing industry.
The question will be: how far does the problem go, especially when a giant, ostensibly well-run, world class bank like HSBC gets caught.
The S&P 500 fell to 1438.07 and had its worst week since late December; the Dow lost 56.8 on Friday finish at 12,580.83 while the NASDAQ shed 28 to 2459.82. For the week, the S&P 500 and NASDAQ slid 0.7 percent, while the Dow dropped 0.6 percent.
The comments from the Fed’s Poole signaled that a core inflation rate, or one that excludes energy and food prices, above 2 percent would be “unacceptable” and might require further interest-rate increases. He also said weak lending standards and a race for fees are probably behind some of the rising defaults on mortgages to high-risk borrowers.
Not helping sentiment in the US Friday was news that Bank of America, the country’s second largest, which said the US Justice Department had agreed not to press charges against it in exchange for its assistance with a criminal probe of the municipal bond market.
Bank of America was the first intermediary to announce a settlement with the US government in connection with an antitrust probe of bid-rigging in the muni market where $US2.3 trillion worth of bonds are outstanding.
But the concentration was on the mortgage providers such as New Century Financial Corp which is based in California. Its shares fell 36 per cent on Thursday and lost another 16 per cent Friday while other lenders to the so-called ‘sub-prime’ market also lost ground.
These companies (including Household, part of HSBC, and a unit of Citigroup) lend money to “sub prime” borrowers, or those with poor credit records, to buy homes.
It’s been a booming part of the home lending market in recent years but many of these companies simply lent money on poor documentation and are now finding that their clients are defaulting.
US figures show that loans past 90 days plus foreclosures and seized properties for subprime loans are at their highest level in at least six years.
New Century, America’s second-biggest sub prime lender, and HSBC last week revealed that defaults from sub prime home loans are piling up faster than they expected.
HSBC said it would set aside $US1.76 billion (more than $A2 billion) than previously estimated to cover bad loans in 2006.
Investors are also worried about those groups which underwrote or repackaged these loans.
