U.S. News

Subprime Woes Aren't Expected to Spread, Fed President Says


The New York Federal Reserve president said Friday that turbulence in the U.S. market for high-risk mortgages is unlikely to have a lasting effect on credit markets, but, in a sign of spreading woes, the subprime mortgage unit of General Electric laid off more employees.

Concern about a widening credit crunch was triggered as record number of home loans were heading into foreclosure last month in the last quarter of 2006 and a string of business failures among lenders in "subprime" sector led some to pull back from the market for borrowers with lower credit ratings.

New York Federal Reserve President Timothy Geithner told a credit market symposium in Charlotte, N. C. that the latest wave of credit instruments has elicited some concern about their implication for the financial system's stability.

"As of now, though, there are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole," he said.

Also lending support to the view that the housing market has avoided a broader collapse was a report from the leading realty association saying that the pace of U.S. existing home sales jumped unexpectedly in February.

Home Sales Rise

The National Association of Realtors said existing home sales rose 3.9% in February to an annual rate of 6.69 million units, as mild weather spurred buying. The average forecast was for a smaller 6.31 million annual sales rate.

This followed a report earlier in the week that housing construction jumped 9% in the month.

Some investors interpreted the new data as signaling that subprime problems were not having an immediate impact on housing. Stocks rose moderately on the news, extending a recent recovery after big subprime-induced selloffs last week. But weak elements in the report such as lower prices and higher inventories later pared some of the gains.

Even the realtors' group cautioned that subprime mortgage market problems are likely to cut sales of new or existing homes by up to 250,000 a year over the next two years.

The lenders themselves have been sharply cutting back on their business in the subprimes amid investigations of lending practices, regulatory orders for some lenders to cease activity and spiraling loan losses.

One of the biggest players in the business, General Electric's WMC Mortgage, said on Friday it had layed off an undisclosed number of employees in addition to previous ones. GE is also the parent of CNBC.

Brandie Young, a spokeswoman for WMC Mortgage, declined to say how many jobs were being cut at the GE unit, but said that it would be "less" people than in a prior round of 460 job cuts earlier in March. Young said all the job cuts were from the Burbank, California-based company's sales force.

When the company disclosed its last round of layoffs, it said it had 1,750 employees left after the firings.

Higher Default Rates

A jump in default rates in the subprime mortgage market in recent months has triggered concerns that the housing crisis may spread to mainstream lenders and damage the economy. At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business as a result.

Borrowers, particularly in hard hit areas of the Midwest, have been unable to get out of their loan obligations by selling off their properties without taking big losses, leading to defaults and forced sales.

The economic data on Friday showed that falling home prices may be boosting demand among shell-shocked buyers. The median existing home sales price last month was $212,800, down 1.3 percent from February 2006, the realtors' group reported.

But the data remained mixed, with inventories of unsold homes rising slightly. Economists were reluctant to declare a rebound in the quiet February month and said the industry needs to get through the critical spring selling season before the underlying health of the sector would become apparent.

"You will have to roll into March and April to get a good feel for the strength of the housing market," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida.

In prepared remarks for a speech at the University of Pennsylvania, managing director Rodrigo Rato of the International Monetary Fund said increasing defaults on subprime loans could spread to other areas of the economy.