Lending crisis ignites broad economic fears

Wall Street cast its vote Tuesday: It looks like trouble.

The Dow Jones industrial average sank almost 250 points after reports showed rising mortgage delinquencies and weak retail sales, suggesting that the woes of sub-prime lenders might be spilling into the broader economy.

Sub-prime lenders make loans to people with shaky credit or erratic income and have been wracked by defaults. Although sub-prime loans make up only about 1 in 5 new mortgages nationally, the rise in defaults could damage the overall housing market as foreclosures weaken home prices and risky borrowers are unable to get new loans.

That in turn could crimp consumer spending, the biggest driver of the U.S. economy.

"People have been using their homes as their banks," said retail industry analyst Adrienne Tennant. "When you figure you can't refinance for the third time, you start wondering, 'Oh, how am I going to pay for all this?' "

Christian Weller, a senior economist at the liberal Center for American Progress in Washington, likened the housing market to the parlor game of Jenga, in which wooden pieces are piled into a tower, then removed one by one.

Fewer loans. Fewer sales. Lower prices.

"We know the bottom part is being pulled out," Weller said. "We don't know if the top is going to come crashing down on us."

For weeks there have been almost daily reports of sub-prime lenders going out of business because of losses caused by customers who couldn't make their payments.

Another shoe dropped Tuesday. Accredited Home Lenders Holding Co. of San Diego, long regarded as one of the strongest sub-prime lenders, said it no longer met the profitability standards set by the Wall Street firms that provided its capital.

The company said it was exploring options to raise new money but could offer no assurance that it would succeed.

Accredited's shares tumbled $7.43, or 65%, to $3.97. Also Tuesday, shares of Irvine-based New Century Financial Corp. -- once the biggest independent sub-prime lender -- were removed from the list of stocks traded on the New York Stock Exchange, which cited concerns about New Century's financial viability. New Century also said it had received a grand jury subpoena, indicating that a criminal probe into its accounting practices and stock trading by company insiders was intensifying.