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Mortgage Crisis Widens at Accredited, HSBC, Lehman
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The U.S. mortgage and credit crisis deepened on Wednesday as Accredited Home Lenders, HSBC Holdings and Lehman Brothers announced job cuts, and concern mounted about the longer-term impact on the economy.
Mortgage lenders announced plans to cut 3,700 jobs, bringing the total of announced housing-related job losses since Thursday to more than 12,300. Many of the cuts are related to subprime lending, which involves loans to people with weaker credit.
"There is no functioning subprime market," said Bose George, a Keefe, Bruyette & Woods analyst. "This is the only way to weather the storm: cut the work force, stop making loans they can't sell, and hope things get better."
Accredited [LEND
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], a San Diego subprime specialist, said it would cut 1,600 of its 2,600 jobs as it shuts most of its retail and wholesale operations by Sept. 5. It also stopped taking loan applications.
Lehman [LEH
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], one of Wall Street's biggest mortgage bond underwriters, said it would close its Irvine, Calif.-based subprime unit BNC Mortgage, resulting in 1,200 job losses and $52 million of charges. It plans to continue making mortgages through its Aurora Loan Services unit.
London-based HSBC, Europe's largest bank, said it would close a Carmel, Ind. office and cut 600 jobs.
Many lenders face a credit shortage because investors will not buy debt they consider less-than-pristine, including asset-backed commercial paper backed by such things as mortgages.
Liquidity problems have spread beyond subprime lenders, raising fears of a global credit shortage, as defaults mounted, investors stopped buying loans, and bankers refused to extend credit to lenders.
Another lender, Woodbury, N.Y.'s Delta Financial, fired 300 employees, while Houston's Amstar Financial Holdings said it will close its mortgage unit and turn over its 118-branch network to The Money Store of Florham Park, N.J.
Separately, tax preparer H&R Block [HRB
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] said its Block Financial unit drew down $200 million from a credit line on Aug. 16, and repaid it when it borrowed $850 million four days later. The Kansas City, Mo.-based company, with investment-grade ratings, struggled to find buyers for its commercial paper.
"The credit markets have become increasingly constrained and unstable," Chief Financial Officer William Trubeck said in a statement. The company plans to sell its Option One subprime unit to private equity firm Cerberus Capital Management.
Economic Harm
The four largest U.S. banks -- Citigroup, Bank of America, JPMorgan Chase and Wachovia -- said on Wednesday they borrowed a collective $2 billion from the Federal Reserve to show support for the financial system.
Much of the market concern stems from home loans made earlier this decade when credit was easy to get.
Loan losses are up at most large lenders, and analysts expect further increases as homeowners struggle to refinance hundreds of billions of dollars of mortgages as rates reset higher.
July foreclosures were up 93% from a year earlier, research firm RealtyTrac said on Tuesday.
Sheila Bair, who chairs the Federal Deposit Insurance Corp., said the agency was being "vigilant" as delinquencies piled up, but that the "tremendous golden age of banking" for U.S. financial institutions was over for now.
Luxury homebuilder Toll Brothers [TOL
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] said on Wednesday quarterly profit fell 85%, and that tighter credit would likely reduce the number of potential home buyers.
Dozens of U.S. mortgage lenders have quit the industry this year. At least a dozen have gone bankrupt, including two on Tuesday: First Magnus Financial of Tucson, Ariz., and Quality Home Loans of Agoura Hills, Calif.
Further increases in foreclosures may weigh on the overall economy, according to Sen. Charles Schumer, a New York Democrat who chairs the Congressional Joint Economic Committee.
"The ultimate harm will extend well beyond the families who will lose their homes," Schumer said in letters to regulators and lenders. "The effects on households, neighborhoods and the broader economy are likely to be severe."
Bad Debts Mount
The job cuts at Accredited will leave the company with one-quarter the employees it began the year with.
"These difficult decisions were made out of necessity in light of the continued and widely publicized turbulence in the mortgage and financial markets," Accredited Chief Executive James Konrath said.
Accredited made $15.8 billion of loans in 2006, and said it plans to honor existing loan commitments. It was unclear how the job cuts might affect its lawsuit to force private equity firm Lone Star Funds to complete its announced $400 million purchase of the company,
The cuts at HSBC Finance were announced three weeks after Europe's largest bank said U.S. subprime exposure helped push overall bad debts from January to June up 63% from a year earlier to $6.35 billion.
As other lenders struggled with credit, IndyMac Bancorp, a Pasadena, Calif.-based thrift and mortgage specialist, said it was resuming making prime, one-family "jumbo" home loans that are too large to be eligible for purchase and guarantee by Fannie Mae and Freddie Mac.
IndyMac shares [IMB
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] closed up 4.2% at $23.45 on the New York Stock Exchange on Wednesday.
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