Creditors cut off one of the nation’s largest home lenders Monday, raising fears that rising mortgage defaults could trip up the ailing housing industry and possibly the larger economy.
New Century Financial Corp., the biggest independent provider of subprime loans in the U.S., said Monday it didn’t have $8.4 billion needed to repay creditors for mortgages it originated that went bad.
Shares of mortgage lenders and homebuilders took the hardest hit.
Accredited Home Lenders Holding Co. lost 28 percent on the day, and Fremont General lost 16.2 percent. Denver-based homebuilder MDC Holdings shed 2.4 percent, while KB Home, another large builder in the state, shed 3.2 percent.
U.S. stock markets initially fell on the subprime difficulties but recovered before the day ended.
The Dow Jones industrial average ended up 42.3 points, or 0.34 percent, to close at 12,318.62. The S&P 500 rose 3.75, or 0.27 percent, to close at 1,406.60.
Several economic reports out this week should indicate what broader damage the subprime meltdown is having.
A report today on retail sales in February will show to what degree, if any, consumers are cutting back on their spending. A consumer sentiment report Friday could indicate whether moods are souring.
Reports on wholesale and consumer inflation this week will show how much leeway the Federal Reserve has to cut interest rates to combat the mortgage- market slump.
The Mortgage Bankers Association will release mortgage-delinquency numbers for the fourth quarter this morning. The figures should shed light on why the subprime-mortgage industry has fallen apart in a matter of a few weeks.
Subprime loans represented nearly one of every five mortgages made in Colorado last year, according to the MBA.
About one of every 10 of those loans was behind at the end of the third quarter.
Credit standards on mortgages are tightening just as the peak spring homebuying season kicks off in the state.
“This is likely to fuel down the number of sales as a certain number of buyers are simply not going to qualify for a loan,” said Arvada mortgage broker Jim Spray.
Assuming that home values don’t fall, mortgage defaults could climb to $225 billion over the next two years, up from $80 billion over the past two years, according to a Lehman Brothers report cited by Bloomberg.
That could translate into 1.5 million more Americans losing their homes out of 80 million households, Bloomberg reported.
Low home-price appreciation and tighter credit standards could make it harder for consumers to pull equity out of their homes, said Lou Barnes, a Boulder mortgage banker who keeps a close tab on the credit markets.
As recently as the third quarter of 2005, U.S. consumers extracted home equity equivalent to 12.5 percent of their disposable incomes, according to an update of a paper co-written by Federal Reserve senior economist James Kennedy and former Federal Reserve Chairman Alan Greenspan.
In the fourth quarter, equity extraction had fallen to 4.8 percent of disposable income.
New Century’s demise is likely to spill over into tougher restrictions for homebuyers with less than stellar credit, big losses for investors in mortgage- backed securities, and fewer options for consumers accustomed to spending down their home equity.
“The spillover may be underway. We may already be soaking wet,” said Barnes.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
