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Bear hit raises fears of debt crisis

Steve Henn Aug 3, 2007

Bear hit raises fears of debt crisis

Steve Henn Aug 3, 2007


Bob Moon: Bear Sterns had its debt rating downgraded by Standard and Poors today. The big investment house has been hit by problems with three high-profile hedge funds, and is one of many financial companies struggling to come to terms with big losses in the mortgage industry.

As Marketplace’s Steve Henn reports, some industry economists are beginning to worry this latest financial crisis may not be so well contained after all.

Steve Henn: Tom LaMalfa’s an economist who has followed the mortgage lending industry for 35 years. He believes the industry’s already in the midst of a credit crunch.

Tom LaMalfa: I’ve never seen anything quite like this.

Big investors who for years have been buying up packages of risky mortgage loans have pulled back.

This week, those decisions drove American Home Mortgage to cease most operations. Other large lenders have found it more expensive to raise cash. And all this is trickling down to consumers.

LaMalfa: It’s going to increase mortgage rates for them.

That will make buying a home cost more, and:

LaMalfa: Fewer and fewer borrowers will be granted credit and will be given home mortgages. And this will have ripple effects, because it will then slow the entire housing market. I ultimately believe that this takes us into a recession.

LaMalfa thinks home prices could fall as much as 30 percent. Most economists aren’t that pessimistic, but agree prices are likely to drop.

Thomas Lawler, a housing economist in Vienna, Va, says potentially thousands of Americans could soon find themselves owing more on their homes than those homes are worth. Think about that for a second:

Thomas Lawler: If they sold their home, they have to bring cash to the closing for the lender. But if people who have to move, job change or whatever, this is a challenging situation.

For many Americans, it would transform what had been their biggest asset — their home — into a liability.

In Washington, I’m Steve Henn for Marketplace.

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