First,today's news:
own more than 240 points in their second-biggest drop of the year as troubles piled up for subprime lenders.
Investors, bracing for a wilting economy, fled the already deflated subprime mortgage sector while problems increased for lenders such as New Century Financial Corp., Accredited Home Lenders Holding Co. and General Motors Acceptance Corp.'s residential unit. Bolstering the belief that the problems are widespread, the Mortgage Bankers Association reported that new foreclosures surged to an all-time high in the last quarter of 2006.The subprime lending worries, coupled with anxiety over the Commerce Department's report Tuesday that U.S. retailers eked out a meager 0.1 percent rise in sales last month, knocked down all three major stock indexes about 2 percent.
"The market's still jittery, and they're starting to get full-blown concerns over a bleed in the larger subprime mortgage market," said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds.
More:
The markets opened down following the release of a new report showing that consumer spending increased only slightly in February, heightening concern that a more tightfisted approach by households could contribute to an economic slowdown.The U.S. Census Bureau announced today that consumers spent $370.5 billion in February, an increase of 0.1 percent from the month before.
Even that small increase masked what analysts view as deeper signs of weakness: Excluding auto, food and gasoline sales, so-called core retail sales declined 0.5 percent from the month before, as consumers pared back their purchases of clothing, electronics, appliances and other goods.
Coupled with a disappointing January performance -- retail sales were flat that month, as households pulled back following the holiday shopping season -- the new data suggest that consumers have become more temperate despite recent wage increases.
And now, a return to Sunday's NYT:
The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.
Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.
Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market.
“The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” said Josh Rosner, a managing director at Graham-Fisher & Company, an independent investment research firm in New York, and an expert on mortgage securities. “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”
While real estate prices were rising, the market for home loans operated like a well-oiled machine, providing ready money to borrowers and high returns to investors like pension funds, insurance companies, hedge funds and other institutions. Now this enormous and important machine is sputtering, and the effects are reverberating throughout Main Street, Wall Street and Washington.
Already, more than two dozen mortgage lenders have failed or closed their doors, and shares of big companies in the mortgage industry have declined significantly. Delinquencies on loans made to less creditworthy borrowers — known as subprime mortgages — recently reached 12.6 percent. Some banks have reported rising problems among borrowers that were deemed more creditworthy as well.
Traders and investors who watch this world say the major participants — Wall Street firms, credit rating agencies, lenders and investors — are holding their collective breath and hoping that the spring season for home sales will reinstate what had been a go-go market for mortgage securities. Many Wall Street firms saw their own stock prices decline over their exposure to the turmoil.
“I guess we are a bit surprised at how fast this has unraveled,” said Tom Zimmerman, head of asset-backed securities research at UBS, in a recent conference call with investors....
Others who follow the industry have voiced more caution. Thomas A. Lawler, founder of Lawler Economic and Housing Consulting, said: “It’s not that the mortgage industry is collapsing, it’s just that the mortgage industry went wild and there are consequences of going wild.
“I think there is no doubt that home sales are going to be weaker than most anybody who was forecasting the market just two months ago thought. For those areas where the housing market was already not too great, where inventories were at historically high levels and it finally looked like things were stabilizing, this is going to be unpleasant.”
Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.
When I first started writing about this over a year ago, people frequently told me I was crazy. There's just no way, they claimed, that the housing bubble would burst the same way the tech bubble once did. Never mind, of course, that the housing bubble was a deliberate creation of Alan Greenspan designed to minimize the damage caused by the collapse of the tech bubble.
Now, it appears even Greenspan himself is worried. And he has even said so publicly.
Once upon a time people bought a home so that they could have someplace to live that they could call their own. If it was an investment, it was a very long-term one. Then the 1990's came along, and all of a sudden a house was considered to be a vehicle for quickly turning a profit. Housing prices went through the roof, often pricing a vast majority of the public out of the market. And everyone acted as if this was normal. It isn't.
I swear to you, I really don't want to be right about this. I really don't. But more and more it is looking like the "soft landing" that so many people had been counting on is not going to come to pass. Which reminds me...
If you think the political climate is hostile to Republicans right now, just imagine what will happen if the economy goes into recession between now and November 2008.
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