New York – The widening fallout in the U.S. mortgage industry has reminded investors of a risk they had forgotten: the fear of risk itself.
As unpaid mortgages and bankrupt lenders bring the weakest segments of the mortgage industry to their knees, investors have begun dumping debt and other investments that would seem to have nothing to do with home loans.
Corporations are paying higher interest rates on their bonds, some private-equity firms are having trouble raising money to close big purchases, and the stock market has lost 7 percent of its value in less than two weeks – all mainly because of an exodus from risk.
“I would characterize it as a loss of excessive risk appetite,” said Ian Lyngen, an interest-rate strategist at RBS Greenwich Capital. “There is a lot more apprehension about layering on riskier assets.”
The flight to safety in the financial markets in the past few weeks can be traced to “subprime” mortgage lending.
Subprime refers to people with spotty credit histories. Fueled by Wall Street’s easy money, the subprime mortgage market exploded to $1.3 trillion over the past few years. But as home prices sagged and more borrowers missed payments on these loans, the industry fell into turmoil this year.
The meltdown of this comparatively small segment of the U.S. economy is contributing to a much bigger and broader issue: Lenders around the world are growing scared to lend.
“It is making people pull in their tolerance for risk,” said Doug Sandler, Wachovia’s chief equity strategist. But Sandler thinks investors had been way too eager take on risk without enough compensation.
Far from crashing, he said the market is returning to normal.
