Slumping house prices and a crisis in the credit markets could be about to push America's largest mortgage lender into bankruptcy, according to a new Wall Street report.
Shares in Countrywide Financial plunged a further 13 per cent yesterday amid continuing turmoil in the US mortgage market. Three smaller rivals have gone bust in recent days, and another was fighting for its life, trying to reassure investors 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 the UK, shares in the former building society Northern Rock were the worst performers in the FTSE 100. Countrywide had earlier admitted 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 to 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. Bankers were reportedly refusing to buy some new Countrywide debt yesterday unless it agreed a punitive 13 per cent interest rate.
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 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 in the second quarter.
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-based lender that was America's 13th largest last year, became the third firm to declare bankruptcy in a week. "The commercial paper market is not functioning for mortgage issuers," said Thornburg's president, Larry Goldstone, said. "We are faced with a market environment where you can't finance mortgages using any of the vehicles that we have used traditionally over the last 14 years in our portfolio."
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 due to 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.
And Kaupthing, Iceland's biggest bank, yesterday agreed to pay €3bn (£2.03bn) 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 JC Flowers.