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Subprime Mortgage Concerns Rattle Markets

"Neither a borrower nor lender be," Shakespeare warned. Subprime lenders were both. And their story, like the one told in Hamlet, may end badly.

Mounting concern over bad mortgages spilled over into the stock market Tuesday. The Dow Jones industrial average fell more than 240 points, amid more bad news from companies that make home loans to people with weak credit.

As lenders, the subprime companies made home loans to high-risk customers who have been defaulting on their mortgages at alarming rates. The companies also borrowed money from Wall Street, which now, in some cases, is now cutting off the credit.


That's what happened to New Century Financial, whose own Wall Street bankers put a stop to its borrowing. New Century had more bad news Tuesday. A federal grand jury and the Securities and Exchange Commission want to see some of its records.

Other subprime lenders are also scrambling to find enough money to keep their doors open. Economist Nigel Gault of Global Insight says the whole mortgage food chain is getting more skittish about lending money.

"What we're finding now is that a lot of the loans that were made in 2005 and 2006, with hindsight, were bad loans — shouldn't have been made," Gault said. "And the market is now correcting. And it may well be a painful correction."

The head of the nation's biggest mortgage company, Countrywide Financial, warned of a liquidity crisis in the industry, saying nervous Wall Street investors are throwing the "baby out with the bathwater." That view is shared by Jay Brinkmann, vice president of the Mortgage Bankers Association.

"The first reaction of the market is 'let me get out and see what's happening. And see how I want to get back in,'" Brinkmann said. "As we see in any kind of situation like this, there is an immediate overreaction, and it will take a while then to swing back."


In the meantime, Brinkman says, home loans will be harder to come by, and that could delay recovery in the housing market from late 2007 until early next year.

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