August 27, 2007–The US stock market ended higher Friday, with the major indexes scoring weekly gains of more than 2%. This was the result of an unexpected rise in new home sales that made the markets believe that the worst of the subprime mess could be over and a recession could be avoided. Believe it or not headlines on the credit challenges and subprime exposure came and went without totally unraveling the market. Stay tuned!
What does this mean for the individual investor?
A number of mortgage lenders and banks still face difficulties. If you are a potential homebuyer things are not like they were only a few years ago when you could get a mortgage with little or no documentation. Even people with A credit are having to produce more documentation for mortgages these days.
A sign of the times
Last week Monday, Thornburg Mortgage (TMA) said it sold $20.5 billion of its AAA-rated mortgage securities portfolio in an effort to boost liquidity amid a rapidly deteriorating mortgage market. Capital One Financial (COF) also announced that it will close its wholesale mortgage business, GreenPoint Mortgage, due to challenging conditions in the secondary mortgage market.
Meanwhile, last Wednesday, Lehman Brothers (LEH) said it will close it’s BNC mortgage unit and cut roughly 1,200 jobs. London-based HSBC Holdings (HBC) and Accredited Home Lenders (LEND) also announced job cuts related to the difficult credit conditions.
However, Wall Street took some comfort in Bank of America’s (BAC) announcement that it plans to invest $2 billion in struggling-mortgage-lender Countrywide Financial (CFC) to help it weather the difficulties in the mortgage market. The cash infusion was seen as a vote of confidence in Countrywide’s long-term prospects and its important role in the mortgage business.
For the most part we are seeing the after effects of a “perfect storm” of inappropriate subprime mortgage loans granted to the least creditworthy among us. Combine this with declining housing prices and we are seeing home foreclosures rise across the nation.
Indeed, with those foreclosures expected to exceed 750,000 this year—and, potentially, to climb to nearly 1 million in 2008—the effects on both housing’s recovery and the general economy could linger well into the future. After all, every one of those foreclosures represents another unit added to our already high inventory of houses on the market. Add in the effects of substantially tightened lending standards on the future ability of numerous Americans to get any sort of mortgage financing, and it seems that housing’s recovery will almost certainly be slow and long coming.
But I’m not certain who deserves the blame: the family that bought far more house than their income and credit status justified, or the mortgage broker and lender who made such obvious craziness possible.
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I will post various articles from time to time, keeping people aware of what is happening in the market and what compainies are surviving. Educate yourself and invest accordingly. Good Luck.