Quick sub-prime update – yet more bad news for the US housing market

We talked about the problems in the US sub-prime mortgage market back in mid February with this blog comment by Stefan. It’s worth revisiting the subject, as one of the lenders that the market had assumed was large enough to remain unaffected has announced that it’s ceasing lending. New Century, the second-largest such lender, is facing a criminal investigation in California, and is likely to breach covenants with its financial backers. The implication of the general withdrawal of liquidity from the sub-prime market – which had been 15% of the US market for home sales until recently – is that the overhang of housing inventory is likely to accelerate. Some analysts reckon that mortgage defaults may add 500,000 homes to the existing inventory backlog. In addition cancellation rates for customers who had contracted to buy new homes has risen to a massive 40%. This has to be bad news for house prices, bad news for consumer confidence, and bad news for the US economy. Also hurting will be fund managers with exposure to bonds backed with cashflows from these US mortgages – in some cases even BBB rated tranches have fallen in price by over 20%. You can follow the Mortgage Lender Implode-o-meter here.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Job Title: CIO Public Fixed Income

Specialist Subjects: Macro economics and fixed interest asset allocation

Likes: Cycling, factory records, dim sum

Heroes: Brian Clough, Morrissey, Neil Armstrong

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