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Slumping house prices and a crisis in the credit markets could be about to push America's largest mortgage lender into bankruptcy, says a new Wall Street report.
Shares in Countrywide Financial plunged again yesterday amid continuing turmoil in the United States mortgage market. Three smaller rivals have gone bust in recent days, and another was fighting for its life, trying to reassure investors that it would find the financial backing to carry on its business.
The problems in the US were rippling out to affect mortgage lenders across the world. In Britain, shares in the former building society Northern Rock plunged, and a Dutch bank that was for sale failed to find a buyer that would take on the riskiest parts of its business.
Countrywide had earlier admitted that mortgage defaults and repossessions among its US borrowers hit record levels - highlighting how the lending boom of the past few years had handed mortgages to hundreds of thousands and possibly millions of low-income Americans who ultimately could not afford them.
Countrywide and its rivals had been able to offer mortgages to even the most risky, or "sub-prime", borrowers, often without requiring them to prove their income or demonstrate a respectable credit history. Wall Street provided the financing, buying even the riskiest loans in order to repackage them and sell them on to other investors, but demand has dried up since defaults began to rise.
Merrill Lynch abandoned a longstanding "buy" rating on Countrywide shares, and investors followed its new advice to sell. Analyst Kenneth Bruce told clients: "If enough financial pressure is placed on Countrywide, or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency. If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt."
US mortgage applications have jumped to a three-month high in the past week, according to data from the Mortgage Bankers Association, as customers rush to refinance existing loans or make multiple applications in order to get on the property ladder.
Lenders have been progressively tightening borrowing requirements, including the necessary down payments, and rates have crept up.
Meanwhile, the National Association of Realtors said the pace of home sales fell in 41 US states and the median price of existing homes sank 1.5 per cent to US$223,800 in the second quarter from a year earlier.
Thornburg Mortgage of New Mexico said it was delaying payment of its dividend to avoid a fire sale of assets, and Aegis Mortgage, a Houston lender that was America's 13th largest last year, became the third firm to declare bankruptcy in a week.
Shares in Northern Rock fell 5 per cent after a third analyst in two days issued a warning about the lender's prospects.
Alex Potter at Collins Stewart said there were "clear risks" of a profit warning because of the adverse credit markets. Northern Rock, which has a high percentage of buy-to-let borrowers, funds its business in large measure by issuing mortgage-backed securities, but it has shed 15 per cent of its value in barely a month as demand for such securities has dried up.
Kaupthing, Iceland's biggest bank, yesterday agreed to pay US$3 billion for the Dutch merchant bank NIBC - but only because the sale excluded NIBC's exposure to the US sub-prime mortgage market, which will remain with the bank's current owner, the private equity group J.C. Flowers. The Icelandic bank said the deal would increase its presence in the Benelux region, as well as giving it a foothold in Germany.
- Independent
