Mortgage woes ripple outward

Ace Hardware and Hearth in Glen Burnie was doing a brisk business in high-end barbecues and hot tubs in the midst of the real estate boom. Now Pete Peterson, an owner of the store, is having trouble selling luxury items for the home as consumer budgets are squeezed.

"When the value of homes went up quickly, people were able to take the money they didn't work for and spend it on things they wanted," Peterson said, referring to soaring home prices that made people feel richer and allowed some to cash out equity. "We've seen people put the luxury items on the back burner."


The home has long been the nation's economic engine. From breaking ground to moving day, the housing industry not only employs construction crews but fuels demand for all sorts of consumer goods.

In recent years, the house also has become a virtual automated teller machine for homeowners looking to tap into the equity under their roofs through the mortgage market.


But that engine is sputtering.

Fears in the credit market - stoked by rising defaults on subprime mortgages extended to borrowers with shaky credit - have spread and made it more difficult, or more expensive, for many homeowners to obtain a mortgage and refinance.

The ripple effects are cropping up in almost every corner of the economy.

Yesterday, for example:

Countrywide Financial Corp. said it had to borrow $11.5 billion from a group of banks to fund loans, as analysts speculated about whether the nation's largest mortgage lender is headed toward bankruptcy.

First Magnus Financial Corp., a Tucson-based national mortgage lender, halted loans.

General Motors Corp., the biggest U.S. automaker, saw debt issued by the home-lending arm of its financing unit downgraded to junk by Moody's Investors Service. Moody's, Standard & Poor's and Fitch Ratings have accelerated their downgrades of mortgage-related securities.

Fannie Mae, the largest U.S. buyer and guarantor of home mortgages, reported that its profit slipped 36 percent last year and it expects higher delinquencies and more credit losses this year.


Government reports showed that housing starts by builders and permits both fell to their lowest levels in more than a decade.

"The underlying problem, of course, is that people are reneging on their mortgages, but that has set off a house of cards," said Michael Greenberger, a professor at the University of Maryland and a former securities regulator. "The big question is whether confidence will return."

Market observers say the depth of the mortgage problem is impossible to ascertain at this point. Not only is it unclear how many more borrowers will get into trouble, but the problems can be masked by the fact that mortgages are repackaged by Wall Street and sold to investors around the world.

"There's a fog over everything, and when the fog lifts, that's when we'll know the extent of this," said Sebastian Hindman, a market analyst SNL Financial LLC. "There are just too many factors to be able to determine when we are going to be able to rebound from this."

The uncertainty has bred volatility on the stock market amid concerns that credit problems will widen so much that they spark a recession. Investors are clearly jittery. Despite a late-day recovery yesterday, the S&P; 500 index, a broad measure of the stock market, has dropped 3 percent this week. The Dow Jones industrial average, a basket of the largest U.S. companies, has fallen 6 percent since last Thursday.

Alan Levenson, chief economist at T. Rowe Price Group Inc., predicted the Federal Reserve would step in with an interest-rate cut to stave off long-term economic decline and said the policymaking body is merely waiting for sure signs of a slowdown, such as higher unemployment and slower corporate spending.


Rumors of an impending rate cut, which would ease pressure on credit markets, helped power the stock-market rally yesterday.

"We're in a period now where everything is readjusting and fear is driving everything," Levenson said. "But I don't think that we're skirting a recession. I think we're skirting more of a soft landing."

Hindman said economists are closely watching commercial loans for signs of higher defaults, especially among developers who might not be able to complete housing projects amid slowing demand. Since many subprime mortgages were extended to borrowers who couldn't afford the loans, some observers question whether lax underwriting standards were also applied to commercial loans, he said.

The credit crisis also is affecting the market for commercial paper, or bonds that companies sell to borrow money for a short period of time, as well as the market for municipal bonds, which governments sell to raise funds, typically for schools, jails and other capital projects. Slack demand for such bonds has pushed prices lower, making it harder for governments and companies to raise money.

Another unknown is consumer spending, which is closely monitored by economists because it accounts for nearly three-fourths of the nation's economic output.

Retailers Wal-Mart Stores Inc. and Home Depot Inc. reported disappointing earnings this week, which they attributed in part to the housing market gloom tightening consumers' budgets. Wal-Mart said it would continue to cut prices to drum up business, further trimming into its profits this year. And Home Depot said it expected the bottom line to be pressured into 2008.


But consumers have continued to spend for years in the face of economic worries. The Commerce Department reported this week that retail sales, which account for about half of all consumer spending, rose more than expected in July after a sharp decline in June that had been blamed on the slumping housing market.

And while home-related credit might be more scarce, other kinds of credit are still readily available. Consumer borrowing rose $13.2 billion to $2.5 trillion in June, more than expected, as people turned to credit cards and non-mortgage loans to maintain spending, the Federal Reserve reported this month.

Brian Peat, general sales manager at Saab of Baltimore in Hunt Valley, said he has seen a change in consumer behavior. While the auto industry has suffered from declining sales, he said, his higher-end customers are still coming in for new cars, but he has noticed one big shift since the real estate boom times - they are buying rather than leasing.

"We used to say, if you have a car payment, why not have the newest and hottest car," Peat said. "They didn't seem concerned about replacing cars every three years and starting the payments all over again. Now, the customers seem to be more focused on keeping their cars longer."