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Fri, Jul 13, 2007 - Page 10 News List

Troubled subprime housing market in US sparks concern

CONTAGION Chairman of Cumberland Advisors David Kotok said billions of US dollars in problem loans could have a major impact on the economy


Fresh troubles in the subprime segment of the US housing market have reignited fears of contagion that could affect the broad financial sector and possibly the broader US economy, analysts say.

Those fears were fanned this week as rating agencies Standard & Poor's (S&P) and Moody's both warned of potential credit downgrades for bonds backed by subprime mortgages, which could affect investors and banks that issued the obligations.

"New data reveals that delinquencies and foreclosures continue to accumulate at an increasing rate," S&P said. "We see poor performance of loans, early payment defaults and increasing levels of delinquencies and losses."

The news triggered a slide in the US dollar and Wall Street shares on Tuesday as investors reassessed their exposure to risky assets like mortgage-backed securities.

Subprime loans that flourished during the last part of the housing boom provided mortgages to people with poor credit histories, often allowing them to buy homes beyond their means through low "teaser" rates.

Many of the loans with adjustable rates or interest-only payments for the first year or two are being recalculated higher, making payments harder.

Industry figures showed the delinquency rate for all mortgages at 4.84 percent in the first quarter but 13.77 percent for subprime loans. Foreclosures were taking place at 0.58 percent of properties, but 5.1 percent for subprime.

David Kotok, chairman at Cumberland Advisors, said the billions of US dollars in problem loans could have a major economic impact.

He said the slump in housing is already affecting some firms like Home Depot, the big home-improvement retailer.

Kotok also said some hedge funds that invested during the property boom were now in trouble too.

"Housing finance is huge. Hundreds of billions of debt instruments are involved in this deterioration," Kotok said. "We have seen hedge funds stop funding withdrawals and we have seen hedge fund sponsors attempt to stem the tide with capital infusions (Bear Stearns). There is much more bleeding to come."

Some fear that the subprime crisis will prompt lenders to tighten standards and curtail mortgages. Fewer buyers will mean the glut of homes will increase and prices may continue to fall.

Moreover, a weak housing market may have what economists call a "negative wealth effect," prompting consumers to curb spending as they see home values decline.

Auto sales last month were far weaker than expected.

But Philadelphia Federal Reserve president Charles Plosser said in a speech on Wednesday that he sees limited "spillover" from the housing mess.

"While there remains the risk that such spillovers may develop, I have doubts they will be very large," Plosser said.

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