Market Slides As Mortgage Woes Escalate

Trader Louis Paolillo, second left, watches the numbers as he works on the floor of the New York Stock Exchange, Thursday morning, Aug. 16, 2007. Stocks fell sharply Thursday after a move by Countrywide Financial Corp. confirmed fears of widening problems with some mortgages and tighter access to credit. (AP Photo/Richard Drew)
AP Photo/Richard Drew
Stocks fell sharply Thursday after a move by Countrywide Financial Corp. confirmed fears of widening problems with some mortgages and tighter access to credit. The Dow Jones industrials fell more than 100 points in early trading.

A sell-off overseas offered Wall Street little reason to try to stanch the bleeding a day after the Dow closed below the 13,000 mark for the first time since April and the Standard & Poor's 500 index moved into negative territory for the year.

Investors' confidence took a drubbing Wednesday on concerns about potential trouble at Countrywide, the nation's largest mortgage lender. Countrywide, referring again to tightening credit conditions, said early Thursday it was forced to draw on an $11.5 billion credit line to fund operations.

"Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise," Countrywide President and Chief Operating Officer David Sambol said in a statement.

Also Thursday, the New York Fed, which carries out the central bank's market operation, said it would step in with a 14-day repurchase agreement worth $5 billion. On Wednesday, the Fed accepted a "repo" of $7 billion, in which it buys that amount in securities from dealers, who then deposit the money into commercial banks.

Central banks around the world have been supplying billions of funds to banks in the past week to make cash available for lending and keep interest rates from rising amid signs that credit was drying up. But investors' anxiety still prompted them to sell.

In the first few minutes trading, the Dow fell 101.94, or 0.79 percent, to 12,759.53.

Broader stock indicators were also lower. The Standard & Poor's 500 index was down 8.24, or 0.59 percent, at 1,398.46, and the Nasdaq composite index dropped 19.31, or 0.79 percent, to 2,439.52.

The credit worries have grown as the secondary market for mortgages all but disappeared in recent weeks. Investors have worried about the value of loans and rising delinquencies and defaults.

Mortgage lenders rely on the secondary markets to borrow money to make more loans. The problems started as subprime mortgages — loans given to customers with poor credit history — started going delinquent and defaulting at faster rates.

The problems have spread to the broader mortgage market, making investors nervous about nearly all types of loans that cannot be purchased by Fannie Mae or Freddie Mac.

Such "conforming" loans are considered safer because Fannie and Freddie are government-sponsored entities. Countrywide said some 90 percent of the loans it originates from now on will be conforming loans or will meet its internal bank criteria.

By adjusting its product mix to originate Fannie and Freddie-approved loans almost exclusively, Countrywide will be cutting out most subprime, alt-A and jumbo loan products.

Alt-A mortgages are given to customers who either have minor credit problems or who cannot provide full income documentation required to get a traditional prime loan. Jumbo loans are mortgages for more than $417,000, the cap at which Fannie and Freddie will purchase loans. Jumbo loans typically are given to customers with excellent credit history.

On Wednesday, a Merrill Lynch & Co. analyst downgraded Countrywide to "Sell," just days after calling it a "Buy," attributing the change to the rapid deterioration of the credit market. Friedman, Billings, Ramsey Group Inc. said Thursday a continued liquidity crunch for more than three months could send Countrywide into bankruptcy.

Asian stocks plunged overnight and European markets fell sharply Thursday as U.S. credit worries continue to spread to other countries.

Credit rating agency Moody's Investors Service downgraded Countrywide's senior debt rating to "Baa3" from "A3," citing Countrywide's funding problems.

A ratings downgrade essentially makes it more expensive for a company to borrow money. Countrywide could be further downgraded if it continues to face liquidity problems, Moody's said in a statement.

The new rating is Moody's lowest investment-grade mark. Any downgrade would take Countrywide into "junk" status, which would keep many large institutional investors from owning its debt.

Countrywide shares fell $2.64 to $18.65 in early trading, with more than 12.6 million shares turning over in the first two minutes of trading.