Survival fears dog US mortgage lenders
America's sub-prime mortgage crisis caused nervous lurches on Wall Street yesterday as two leading home loans companies suffered a crisis in investor confidence and the Federal Reserve dampened economic expectations.
Shares in America's biggest mortgage lender, Countrywide Financial Countrywide Financial Corporation (NYSE: CFC) is a diversified financial marketing and service holding company engaged primarily in residential mortgage banking and related businesses. , dived 22% at one point on rumours of bankruptcy, prompting a hurried assurance from the firm's management that it had "ample liquidity and capital".
The sell-off came hours after the government-sponsored mortgage guarantor Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. revealed that it was in danger of breaching minimum liquidity requirements following an $8.1bn (£3.9bn) drop in the value of its assets, prompting its stock to collapse by 29%.
On a day of severe volatility, the Dow Jones Dow Jones
the best known of several U.S. indexes of movements in price on Wall Street. [Am. Hist.: Payton, 202]
See : Finance dropped by more than 100 points at one stage before closing up 51 at 13,010.
As economists continued to debate whether the credit crunch Credit Crunch
An economic condition whereby investment capital is difficult to obtain. Banks and investors become weary of lending funds to corporations thereby driving up the price of debt products for borrowers. will lead to a recession, the Fed released long-term forecasts which scaled back expectations for economic growth next year while playing down prospects of lower interest rates.
Minutes from the Fed's October meeting described the recent cut in rates as a "close call". The central bank predicted growth could slow next year to 1.8% - significantly below the range of between 2.5% and 2.75% envisaged in June.
After a steady stream of red ink red ink Health administration A popular term for financial losses. Cf in the Black. , write-downs and losses from major financial institutions, concern is mounting about the true extent of the liabilities of some of America's biggest lenders.
Countrywide, which provides one in seven US mortgages, has already disclosed $1bn in losses but was hit by a downgrade yesterday by analyst Howard Shapiro at stockbroker Fox-Pitt Kelton, who headed his note: "The lifeline is withdrawn."
He argued that Countrywide's main route to passing on loans could evaporate due to problems afflicting af·flict
tr.v. af·flict·ed, af·flict·ing, af·flicts
To inflict grievous physical or mental suffering on.
[Middle English afflighten, from afflight, Freddie Mac and Fannie Mae Fannie Mae: see Federal National Mortgage Association. - the twin companies established by the US government to promote home ownership by purchasing mortgages, repackaging them and selling chunks on the capital markets. He said Freddie Mac's position was "as bad as it could possibly be".
Freddie Mac revealed a $2bn quarterly loss, a $1.2bn provision against bad loans and an $8.1bn drop in the value of its assets. It said it was considering slashing its dividend to shareholders by 50%.
Freddie Mac has called in Goldman Sachs The Goldman Sachs Group, Inc., or simply Goldman Sachs (NYSE: GS) is one of the world's largest global investment banks. Goldman Sachs was founded in 1869, and is headquartered in the Lower Manhattan area of New York City at 85 Broad Street. and Lehman Brothers Lehman Brothers Holdings Inc. (NYSE: LEH), founded in 1850, is a diversified, global financial services firm. It is a participant in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. to advise it on "very near-term capital-raising alternatives". It said its core capital of $34.6bn was just $600m above the 30% mandatory target for its financial surplus directed by the US government. Its chief executive, Richard Syron, speaking on a conference call, said he was pessimistic about the economic outlook: "We do not believe it would be wise to be sanguine about the medium-term housing market."
The prevailing gloom was in spite of an unexpected bounce in construction, as the US commerce department reported that work started on 1.229m homes in October - a 3% rise on September's figure.
Although the increase was the biggest since February, the strength was largely in apartments. The all-important category of family homes showed a continuing decline, as did the number of future building permits, which fell 6.6% - indicating a weaker long-term trend.