AP News, March 16th, 2007
Some people might wonder if the angst over problems in the subprime mortgage market is overblown, but that hasn't stopped some investors from using it as a reason to pare their stock portfolios.
Wall Street shuddered as mortgage lenders admitted that borrowers with shaky credit were delinquent _ put another way, defaulting _ at an alarming rate. The fears were that subprime mortgage loans, those made to people with poor credit ratings, were just the start, and that borrowers with stronger credit ratings would also have problems making their payments.
Major U.S. investment banks this past week were quick to assuage market fears by declaring troubled loans were contained to just the subprime market. But, that wasn't enough for some investors faced with an already slowing U.S. economy and a depressed housing market.
"It's a major exit point," said Matthew Smith, president and chief investment officer with New York-based money management firm Smith Affiliated Capital.
Not helping the situation was Alan Greenspan.
The former Federal Reserve chairman, who last month fed the global stock selloff with comments about a possible recession in the United States, predicted the subprime shakeout will worsen. He said subprime mortgage defaults would spread to other parts of the economy, especially if home prices decline.
"If prices go down, we will have problems _ problems in the sense of spillover to other areas," Greenspan said at a Futures Industry Association meeting in Boca Raton, Fla. on Thursday.
The immediate impact of a shakeout among subprime mortgages obviously will be on the lenders themselves. News that lenders are being denied financing from creditors, and might be forced to sell loan portfolios at deep discounts, has ravaged their stock prices _ with some plunging 90 percent or more.
The next wave of investor discontent pounded financial services firms, especially ones with exposure to the subprime market. Investment banks like Bear Stearns Cos. and Lehman Brothers Holdings Inc. not only are creditors to many mortgage lenders, but buy their loans and repackage them as mortgage-backed securities.
And, although subprime exposure for both of those investment houses is minuscule when compared to their overall business, it has still made investors nervous. The Amex Securities Broker/Dealer index, which tracks 12 of the most widely known firms in the sector, has fallen 11 percent since companies began to disclose problems in subprime loans on Feb. 8.
That was the day HSBC Holdings Inc., Europe's largest bank, admitted delinquencies on risky U.S. mortgages rose to a four-year high. It was also the day New Century Financial Corp. announced it had lost track of how rapidly its loan portfolio deteriorated.
Certainly, the U.S. mortgage crisis was partly responsible for the Feb. 27 global market swoon that included a 416-point drop in the Dow. Problems with subprime lenders _ along with a sell off in Chinese stocks and worries about the economy _ have made Wall Street increasingly more cautious about companies in general.
"I think the issue with the subprime space is really a huge issue and is about what effect it will have on the consumer," said Jeffrey Mortimer, chief investment officer for equities at Charles Schwab Investment Management. "I worry about consumer spending, which is two-thirds of the economy.
He contends consumers unnerved by a buckling of some subprime mortgage lenders and a pullback or leveling off in home values could ratchet back their spending. This kind of logic puts a number of sectors on Wall Street at risk.
Beyond the obvious fallout on home builders, retailers are the next biggest target. Americans worried about making their mortgage payments could be that much less willing to spend.
Home improvement stores like Home Depot Inc. and Lowes Corp., which already have been affected by the slowing housing market, could be further hurt as people do less home renovating. Appliance makers like Whirlpool Corp. might also see sales dwindle as homeowners put off buy a new refrigerator or washing machine.
It could also trickle down into national chains like Wal-Mart Stores Inc. and Target Corp. if consumers just don't have as much free cash to spend. Wal-Mart already saw an impact on its sales last year from rising gasoline prices.
Smith, whose firm manages about $1.7 billion in customer assets, said turmoil in the mortgage sector will only make consumers more concerned about how they spend. But, while retailers are hurt, there are other more defensive sectors that will still thrive.
"The non-discretionary companies are where most will look toward," he said. "No matter what happens to homeowners, there is still a need for energy, and there is still a need for health care. That's not going to change no matter where the economy is."
