US mortgage crisis goes into meltdown


Richard Moore

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US mortgage crisis goes into meltdown
By Ambrose Evans-Pritchard
Last Updated: 1:15am GMT 24/02/2007

Panic has begun to sweep the sub-prime mortgage sector in the United States 
after the bankruptcy of 22 lenders over the past two months, setting off mass 
liquidation of housing loans packaged as securities.

        Analysts say the housing bust is pulling America into
        recession, citing a 14.4pc drop in housing starts

The rapid deterioration could not come at a worse time for British bank HSBC, 
which has set aside $10.5bn (£5.4bn) to cover bad loans in the US.

The cost of insuring against default on these loans has rocketed in recent 
weeks, from 50 basis points over Libor to 1,200, raising fears that a credit 
crunch could spread to the rest of the property market.

Low-grade BBB-rated securities - measured by the ABX index - have crashed from 
near par of 100 in early November to 72.5 this week.

Peter Schiff, head of Euro Pacific Capital, said the sector was in an 
unstoppable meltdown. "It's a self-perpetuating spiral: as sub-prime companies 
tighten lending they create even more defaults," he said.


California's ResMae Mortgage filed for bankruptcy last week as it struggled to 
cope with defaults on a $7.7bn book of sub-prime loans issued last year, while 
Accredited Home Lenders in San Diego warned that bad debts had reached 7.18pc of
its portfolio.

HSBC chief executive Michael Geoghegan, who stepped in to take control of the US
division earlier this month claiming "The buck stops at my door", has ousted top
executives. But the worst may not be over for Household International, the 
property arm it acquired for $14.4bn in 2003 to capitalise on the housing boom.

Rating agency Standard & Poor's is shifting its focus to the tier of debt above 
sub-prime, eyeing loans covering people viewed as better credit risks but who 
lack the steady income needed for prime status.

S&P has placed 11 loan packages worth $146m on watch for a possible downgrade 
this week, saying it was most worried about "piggyback" second mortgages. "There
is a potential danger of default on these deals," said credit strategist Robert 

For now, the US Federal Reserve believes the damage can be contained. "I don't 
think there'll be a large impact on prime mortgages from the sub-prime market," 
said governor Susan Schmidt Bies.

However, she warned of a "hidden" problem caused by sellers pulling property off
the market. " The percentage of homes where nobody is living in them is at a 
record level. So the potential for inventory correction is still very high," she

Nouriel Roubini, economics professor at New York University, says the housing 
bust is slowly pulling America into recession. He cites a 14.4pc drop in housing
starts last month; an expected loss of 600,000 real estate jobs in 2007; a sharp
fall in home equity withdrawals - down from 6pc of GDP at the top of the boom; 
and a squeeze as $1,000bn of mortgages are adjusted upwards this year to higher 
interest rates.

Mr Roubini said: "America faces a 'reverse cycle' where a credit crunch has hit 
before the slowdown, a rare pattern. Normally, recession comes first, setting 
off credit troubles in its wake. We have a housing recession, an auto recession,
a manufacturing recession, and a real investment recession already present. If 
all this happening in what the consensus terms as a 'Goldilocks economy', what 
would happen if the economy slows down?"

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