Orange County felt the full brunt of the turmoil in the financial markets Friday as many local companies saw stock values drop, and the sudden hike in interest rates sparked concern about the county's fledgling real estate revival and bankruptcy recovery plan.
The combination of a 171-point drop in the stock market and a 1/3-point increase in the mortgage lending rate rocked the county on a number of economic fronts Friday:
* Of the 111 companies in The Times' index of Orange County stocks, 84 saw their share prices decline. Overall, the long-rising index skidded by 2.6%, the biggest single-day drop since the measure began more than a year ago.
* The interest rate hike, triggered by the tumbling bond market, sent home buyers and real estate agents scurrying to lock in lower rates and salvage deals.
* Orange County officials, worried that the rising rates could hamper its bankruptcy recovery plan, proposed that interest rate insurance be purchased before $800 million in bonds are sold this summer.
As rates continued to go up Friday, Orange County CEO Jan Mittermeier suggested the county buy an "interest rate cap agreement" in which an investment bank would cover any extra costs if rates exceed a certain level.
"We haven't reached the point yet where we are at dangerous levels," said Chris Varelas, an investment banker with Salomon Bros., the firm that is advising the county on its bond issue. "But given interest rates are the one variable beyond the county's control, we believe it may be prudent that the county protect itself against this risk."
The market upheaval left local investors scared, frustrated and confused.
After seeing his modest mix of bonds and stocks tumble in value, John Anderson, who invests through Newport Securities Corp. in Costa Mesa, said: "The whiz kids of Wall Street see a variance and they hit the sell button. The little mom and pop investor has no concept of what happened today."
Like the investors, Orange County companies could do little but watch as their shares were caught in the tailspin on Wall Street. Companies in all industries were affected, particularly those in the volatile high-tech and biomedical fields.
PacifiCare Health Systems, the Cypress-based health maintenance organization, had the biggest dollar loss. Its Class A stock fell $4 to close at $92.50, and its B stock dropped $4.25 to $94. On paper, that translated to a one-day decline of about $125 million in the company's market value.
Laurie Little, an investor relations analyst at PacifiCare, said the stock-price drop had little to do with the company, which had been enjoying a steady climb in its stock value.
"I just think everybody took a beating today. There was a major sell-off," she said, adding that 18 out of the 20 publicly traded HMO stocks she follows also fell Friday.
Like Little, other company executives downplayed the significance of the stock market decline, noting that even after Friday, share prices were well above last year's levels.
Richard Sample, head of the retail brokerage operations at Cruttenden Roth Inc. in Irvine, said he was bracing for a busy Monday.
"A big down day on a Friday gives people time to think about it over the weekend," Sample said. "That's what happened in 1987," he said, recalling that Monday in October 1987 when the Dow Jones Industrial Average fell 508 points after a previous Friday drop of 108 points.
Jeff Kilpatrick, president of Newport Securities Corp. in Costa Mesa, said the drop Friday prompted his firm to unload about $1 million in stock.
But he pointed out that that represents less than 5% of the total holdings of the firm's client base, and that much of that money will be plowed back into other stocks as investors hunt for newly created bargains.
"The question I heard most [from investors] today was, 'What's cheap? What's down the most today?' " Kilpatrick said.
But there was near panic in the offices of many real estate brokerages in the county.
After a hectic day in which some lenders raised rates twice by the late morning, rates on a 30-year, fixed rate mortgage ended the day at or near 8%--raising monthly payments by $70 from the previous day's rates and preventing many potential buyers from qualifying for home loans.
Orange County's home sales had surged 31% in February, the biggest increase in nearly two years, prompting analysts to predict that the market will continue to improve throughout the year. But a spike in mortgage rates could frighten buyers, especially those buying for the first time.
Ann Marie Sante and Chris Kates were in escrow on a Coto de Caza home with 5% down, but couldn't close on their home as scheduled Friday, said their broker, because the lender wouldn't approve the loan at higher rates.
"They are very distraught now. They've already rented a house and may have to be in a motel," said Elain. "Many of the buyers in trouble today were young buyers."
Times staff writers Greg Miller and Debora Vrana and correspondent Shelby Grad contributed to this story.