Lots of chickens came home to roost on Tuesday but they didn't exactly fly
in unannounced.
First the stock market tanked for the second time in two weeks and while the
subprime mortgage market got a passing mention the last time around; on Tuesday
the blame for the 242.66 drop in the Dow Jones was laid squarely at the feet
of the housing market.
First the news about the subprime mortgage market got even
worse with several major subprime lenders releasing news about their financial
condition that could only be described as disquieting.
Then Mortgage Bankers Association released delinquency figures for the fourth
quarter of 2006 and that sent the market straight over the edge.
New Century Financial which had taken heavy hits to its stock
price over the last ten days and stopped taking new loan applications last Friday
announced early on Tuesday that its warehouse lines had been closed by several
major financial institutions making a bankruptcy almost inevitable. Analysts
predicted that stockholders would not recover a cent from their holdings of
the stock which was, within the last few months, valued at around $20. Later
in the day the stock was de-listed from the New York Stock Exchange.
Other mortgage companies were scrambling to secure continued funding as major
banks eyed their own exposure to the subprime market through warehouse lines.
Accredited Home Lenders said it had paid $190 million in margin calls from its
creditors thus far in 2007 and is trying to raise fresh capital and renegotiate
some of its financial relationships.
Even General Motors which was reporting a lot of good news from its automotive
business was hit by the mortgage market as mortgage losses at its former financial
division, 50 percent of which it has recently sold, dragged down the results
that Wall Street had expected.
Then there were those delinquency figures. The MBA report
is worth a thorough analysis, particularly in light of the many categories they
use to present their data and we will attack the complete report later this
week. Suffice it to say the headlines alone were enough to bring the stock market
the rest of the way to its knees. The overall delinquency rate for one-to-four-unit
properties, seasonally adjusted, was up 28 basis points from the third quarter
to 4.95 percent. This was 25 points higher than the fourth quarter of 2005.
Subprime and FHA loans were, as always, the hardest hit; 13.46 percent
of all subprime loans are now delinquent, an increase
of 77 basis points since the third quarter and an identical percentage of FHA
loans were also not performing, an increase of 66 basis points. Delinquent prime
loans increased from 2.44 percent to 2.57 percent and VA loans went from a delinquency
rate of 6.58 percent to 6.82 percent.
The stock market made a modest recovery on Wednesday with the Dow up nearly
60 points an hour before the closing bell. But where does the fallout
end? A pessimist will tell you that many 401Ks hold stocks with subprime
lenders or with the banks that own them as subsidiaries. Banks such as Citi
and J.P. Morgan have warehouse lines with subprime lenders and with New Century
already admitting it can not pay its creditors, can other lenders be far behind
in defaulting on theirs? Then there are the builders who are already looking
at large inventories of unsold houses that will now be harder to sell with many
potential buyers closed out of access to sufficient credit or maybe even any
credit. Those builders may pull back from plans to resume full-scale building
this spring meaning more layoffs in the construction industry. Carrying it a
step or two down the road, lumber mills, appliance manufacturers, and local
tradespersons will also be effected as will retail outlets for building materials
such as Lowes. As subprime lenders fail or file for bankruptcy, commercial building
owners will be confronted with leases that are no longer enforceable although
New Century's landlord stated Tuesday it would have no trouble releasing the
several hundred square feet occupied by the company and at a higher rate than
New Century had been paying.
On the other hand, is this a time to panic? 96 percent of mortgagees are making
their payments on time. Freddie Mac and Fannie Mae, the big players in the mortgage
market claim they have little exposure to subprime loans. And it's not as though
this shakeout has come as a surprise - analysts and economists have been expecting
it for over a year. A few high risk companies will undoubtedly bite the dust
and shareholders are going to wish they had opted for safer investments with
a lower return. It is probable that cooler heads will prevail
and that they will do so soon. Better managed and more risk adverse companies
will purchase portfolios of their bankrupt competitors at a discount and go
on to make more money, housing prices will return to more reasonable levels
to compensate for tightened credit, a lot of people will get burned a little
bit, a few will really suffer. But we probably aren't looking at Armageddon.