Mortgage Problems May Start to Hurt Stock Market
In an ominous sign that concerns about the housing market are growing, two major financial rating houses on Tuesday raised questions about the health of billions in bonds tied to the troubled bad credit mortgage market.
The warning sent a shiver through Wall Street, where the Dow Jones sank nearly 150 points, as analysts contemplated the potential domino effects of lower ratings for these mortgage-backed securities.
In the most dramatic scenario, a move by the rating houses could strangle what until recent months was a major propellent of home prices:
Access to easy money.
“The danger is that these mortgage loan problems could spread, and that there will be a lot of pain,” said mutual fund manager Henry Van der Eb, of the Gamco Mathers Fund in Bannockburn.
The market for bad credit home loans, which provides mortgages to home buyers with spotty credit histories, buoyed the residential real estate market and spurred prices higher through the recent boom years for housing.
But now, “subprime” loans are dragging down the market and dinging the economy, as many borrowers have begun to miss payments.
Several large lenders have filed for bankruptcy, and others have sharply limited lending. Tuesday showed how crucial real estate is to the economy, and how interconnected home buying and finance can appear.
The announcements that spooked investors came from Standard & Poor’s, which said it would consider downgrading $12 billion in bonds tied to bad credit mortgages, and Moody’s Investors Service, which lowered the credit ratings on $5.2 billion of such bonds.
Because trillions of dollars in mortgage debt are held by banks, pensions funds, insurance companies and other institutional investors in the form of bonds or bundles of home loans, “problems with collateral could snowball.”
The concern about lowering the rating on bonds is the spillover effect: As institutional investors are reluctant to hold onto lower-rated debt, they may find themselves forced to sell amid fewer buyers.
Insurers and pension funds may be among those required to sell their bonds if they are downgraded, driving down prices for the $800 billion in subprime mortgages and $1 trillion of collateralized debt.
Down the line, that could make a mortgage harder to obtain for first-time home buyers, because there would be a smaller market for such loans among institutional investors.
Some analysts were critical that it has taken ratings agencies too long to act on defaults in the mortgage market. Already, selling mortgage-backed securities is becoming difficult. Some are being sold at a loss.
Three weeks ago, Bear Stearns Cos., one of Wall Street’s largest investment firms, was forced to rescue two of its hedge funds holding subprime mortgage debts, providing a bailout of up to $3.2 billion.
Also Tuesday, D.R. Horton Inc., the nation’s second-largest home builder, said it will report a third-quarter loss after orders plunged 40 percent.
The company said it sees no sign of a housing rebound.
“All these companies face a lot of pressure,” said Thomas Smith, an equity analyst at Standard & Poor’s in New York. “It’s a tidal wave of trouble.”
Overall, home mortgage defaults remain relatively low. In the year’s first quarter, 0.58 percent of loans fell into the foreclosure process. A year earlier, 0.41 percent of such loans went into foreclosure.
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