Mortgage worries rise as key credit index hits record levels

Mortgage worries rise as key credit index hits record levels
By Richard Beales and David Wighton in New York
Copyright The Financial Times Limited 2007
Published: February 14 2007 02:00 | Last updated: February 14 2007 02:00


Concerns over risky US mortgage lending mounted yesterday as a key indicator of credit problems hovered at record levels, another small mortgage lender failed and a big homebuilder admitted borrowers' difficulties could damage its business.

Investor worries over loans made to US borrowers with weak credit histories have grown since housing market activity slumped last year. They were throwninto sharper relief last week when HSBC and New Century warned they had underestimated the spike in defaults on so-called sub-prime mortgages.

A credit derivative index tracking credit risk on sub-prime mortgage bonds has soared to a record high this week. The ABX index, based on bonds rated BBB-, has traded at levels approaching 1,000 basis points- up from 650bp a week agoand about 250bp last autumn.

Meanwhile, California-based ResMAE Mortgage filed for bankruptcy yesterday, becoming the latest in a string of sub-prime lenders to succumb. The company, backed by prominent investment firms Thomas H Lee and Putnam Investments, said the sub-prime market had been "crippled".

KB Home, the US housebuilder, said deteriorating lending conditions could affect the projected recovery in housing. "If sub-prime tightens up and underwriting tightens up, it's going to impact demand," said Jeffrey Mezger, chief executive.

Sub-prime mortgage-backed bonds have suffered in the fallout along with the shares of specialist lenders such as New Century and Countrywide, and bigger diversified banks such as HSBC and Citigroup.

But the sell-off in the ABX indices has been most dramatic. These indices allow traders to buy and sell insurance against default on mortgage-backed bonds. As the cost of this protection rises, earlier protection buyers make paper gains and sellers make losses.

Peter DiMartino, asset-backed securities strategist at RBS Greenwich Capital, said the reason for the sell-off included fears that more lenders would announce bad news.

Most analysts do not see signs that the sub-prime upheaval is spreading to other parts ofthe credit markets. Other kinds of debt, such as company bonds, remain near all-time highs.

Credit Suisse said yesterday it was buying $19.1m of ResMAE's assets and would provide financing to allow it to continue operating. Merrill Lynch, Lehman Brothers, Morgan Stanley and Barclays Capital have also bought sub-prime lenders in recent months.

Additional reporting by Doug Cameron in Chicago and Saskia Scholtes in New York