Mayhem continued to roil the mortgage market this week, as the subprime problem seemed to permeate the lending landcsape. The once again added money to the banking system then delivered a highly anticipated interest rate cut to prevent any full-blown credit crunch.
Nevertheless, there were casualties big and small, while some investors sought a safe haven, chasing the short end of the interest rate curve, prompting a huge rally in Treasury bills and notes.
All eyes were on Countrywide Financialwhich struggled under the weight of its huge loan portfolio. Shares in the huge mortgage lender fell throughout the week as it tried virtually everything to deal with liquidity problems. Among other things, the company tightened lending standards.
Fitch Ratings Wednesday downgraded Countrywide's senior debt two notches to "BBB-plus," a low investment grade, while Merrill Lynch downgraded the stock. On Thursday, the company said it was drawing down an $11.5 billion emergency credit line.
Thornburg Mortgagewas one another company to come under the spotlight amid the industry credit crunch.
Thornburg shares were on a rollercoaster ride. They fell sharply Tuesday as several brokerages and Moody's Investors Service downgraded the residential mortgage lender amid concerns about liquidity, then rallied Wednesday as worries dimninished.
The company's president Larry Goldstone toldCNBC Wednesday that the residential mortgage lender is still having having problems raising financing but has begun to "turn the corner" and hopefully "by next week it will be pretty much back to business as usual."
Jumbo Loans, Big Trouble
The mortgage market mess is catching up with both lenders and borrowers beyond the subprime category. Suddenly, so-called jumbo mortgages --anything above $417,000 -- are harder to get and that's a problem for people in some big markets like new York City, where properties are unusually expensive. Thirty-year Jumbos are now costing 70 basis points more than conventional mortgages. Some lenders have jacked rates as a way of discouraging buisnesss.
Mortgage Activity Up
On the positive side, mortgage activity increased for the second week in a row, seeming to fly in the face of a spate of reports pointing to a crisis of confidence in the mortgage industry.
The Mortgage Bankers Association's seasonally adjusted mortgage application index rose 3.4% in the week ended Aug. 10 to 678.7, its highest level since the middle of May, driven by growing demand for refinancing and home purchase loans.
Analysts downplayed the gain somewhat, speculating that borrowers may be filing multiple applications as more mortgages get rejected, thus distorting the overall data.
Housing Hurting Too
The misery in the mortgage market was matched by the housing market. Both housing starts and building permits fell again in July. An an annualized basis, activity was the lowest in a decade. Both indices were about 20% lower than a year ago.
The South posted the biggest decline -- more than 10% -- but the Midwest -- a region that did not experience a housing boom the way other parts of the country did -- managed a 2.6% gain.
No wonder then that homebuilder sentiment fell in July to a new 16-year low, reflecting tighter lending standards and the overall market malaise. The National Association of Home Builders said it was the lowest reading for its index since January 1991, a time the economy was in recession.