Stand by for a rough day on the markets.The gathering US subprime mortgage crisis we’ve been writing about for the past month reared its ugly head today and hit Wall Street hard, assisted by lower than expected retail sales and a fall in the US dollar.
The Dow fell 1.97 per cent or more than 240 points, the S&P 500 was down a similar amount while there were big losses on NASDAQ as well.The Sydney Futures Exchange’s SPI contract was pointing to an 80 point plus fall at the opening on the ASX today.
That fall in the dollar against the Yen in particular came on reports of more unwinding of so-called carry trade deals by big investors: they are selling their leveraged investments and buying yen to close out their deals.Oil and gold fell to $US58.04 a barrel and $US643.90 an ounce respectively in New York and US 10 year bonds fell to 4.49 per cent, lower than they got during the sell-off a fortnight ago.
But driving the negative sentiment was more bad news for the stricken US housing industry which seems to be sliding further as the crisis in the subprime mortgage area worsens.
The US Mortgage Bankers Association said foreclosures are rising on loans to borrowers with the best credit ratings, as well as subprime borrowers.Investors took fright at that news because it means broader trouble in the housing market and sold off financial stocks, buildings, home developers, retailers and any other stock they could find with an association with housing.
The S&P 500 slid 28.65, or 2 per cent the Dow fell 242.66, or nearly 2 per cent,and the NASDAQ dropped 51.72, or 2.2 per cent.The report from the Mortgage Bankers Association showed that in the fourth quarter of 2006 about 2.57 per cent of so-called prime borrowers were at least 30 days late in their mortgage payments, the highest level in almost four years.
And the level of late payments (or ‘delinquencies’ in US jargon) for subprime borrowers reached 13.33 per cent, also the highest since 2003’s second quarter.
The share of subprime borrowers making late payments rose percent from an already high 12.56 per cent in the third quarter.
Overdue payments on all types of loans rose to 4.95 per cent from 4.67 per cent in 2006’s third quarter. That was the highest since the second quarter of 2003.
Analysts and others use the late payment figures asan early indicator of mortgage defaults in a housing market. In January, there were 4.09 million new and previously owned homes for sale, up from 3.41 million a year earlier, according to data from the National Association of Realtors and the US Commerce Department last week.
Analysts point out that with lenders leaving the subprime sector, builders cutting back on developments, banks and other lenders lifting standards, and the oversupply of new and existing houses, the US housing industry’s woes are not over and won’t be for a while.
The late payment and default rateswill also worsen further to take account of those who have run into problems this quarter.
The Mortgage Bankers said its report wasbased on a survey of 43.5 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.
More than 20 subprime companies have either failed, stopped making loans, curtailed lending or been sold in the past year with the second biggest new Century stranded with no money and creditors pressing for payment. Well over 5,000 employees of these companies have lost their jobs in recent months.
And GMAC LLC, the auto and home lender owned by Cerberus Capital Management(51 per cent) and General Motors (49 per cent), reported a fourth-quarter loss at its mortgage unit after setting aside more money to cover losses on subprime loans.
The operating loss at the company’s ResCap unit was $US651 million, compared with profit of $US118 million a year earlier and more will come as the company tries to sell off billions in these loans over the next few months.
With other lenders doing the same, values will fall, meaning big losses for some before this is all over.
