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Lending crisis ignites broad economic fears

Stocks dive as data show more home loans in delinquency and new foreclosures at a record.

March 14, 2007|Walter Hamilton, E. Scott Reckard and Molly Hennessy-Fiske | Times Staff Writers

"If the deterioration in credit quality in the sub-prime market spreads and prompts lenders to significantly tighten lending standards more broadly, that could have a significant impact on the ability of consumers to spend," said Hoyt, who works for Economy.com.

Angelo R. Mozilo, chief executive of Countrywide Financial Corp. of Calabasas, the nation's largest mortgage lender, said in a television interview Tuesday that the sub-prime industry was in a liquidity crisis that was "going to get uglier" as money for new loans to less-qualified borrowers dried up.

Many borrowers have loans with low introductory rates that adjust higher, and those homeowners had been counting on refinancing their mortgages to avoid sharp increases in their payments.

To help such people stay in their homes, Sen. Christopher J. Dodd (D-Conn.) said he planned to introduce legislation that would offer sub-prime borrowers "forbearance or something like that to give them a chance to work through and get a new financial instrument." Dodd, chairman of the Senate Banking Committee, is a presidential hopeful.

Also Tuesday, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he wanted to introduce a measure to make it harder to get sub-prime loans. In some cases, such mortgages were issued without proof of the borrowers' income -- leading to criticism that from the start the loans were headed for default.

But tighter federal regulations, combined with Wall Street's anxiety, could further weaken the sluggish housing market as it enters the crucial spring season, when many owners are banking on unloading their homes, said Patrick McPherron, an economist with Moody's Economy.com who specializes in mortgage markets.

So far, the housing market in California has fared better than those in many other parts of the country because of strong economic fundamentals and low unemployment. But the crisis in the sub-prime lending industry threatens to change that, McPherron said.

"All it could take is a few more precipitous falls," he said, "and the bottom could fall out."

walter.hamilton@latimes.com

molly.hennessy-fiske@

latimes.com

scott.reckard@latimes.com

*

Times staff writer Leslie Earnest contributed to this report.

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