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US Mortgage Defaults Rise Sharply, Driving Stock Prices Down


The recent downtrend in U.S. stock prices is being blamed on nervous investors - in particular, those who are worried about mortgage companies' financial difficulties, especially the problems facing so-called sub-prime lenders – those who offer home loans to people with poor credit. Those worries peaked Tuesday to push the Dow Jones Index down more than 240 points, the second biggest plunge in four years. Many homeowners facing sharply rising loan payments also are in trouble. VOA's Mil Arcega reports.

With mortgage rates rising and house prices falling, experts say as many as one and one-half million Americans could lose their homes. Rick Sharga, with RealtyTrac, a company that provides information on real estate trends, says foreclosures are at an all-time high – up 42 percent since 2005.

"It's almost a perfect storm if you are a homeowner who is in distress right now,” Sharga says. “Because you are seeing housing values go down in parts of the country, so the house might not be worth what you paid for it."

The Foleys are among the thousands of homeowners on the brink of losing their homes. The couple refinanced at a low interest rate to free up money for medical bills. But when interest rates went up, Marilou Foley says, their $1,700 monthly payment doubled.

"I've been packing, because I'm waiting any minute to get the bad news," she said.

Analysts say during the housing boom when interest rates were low, borrowing by homeowners with little cash and poor credit more than tripled between the years 2000 and 2006. Ivy Zelman, with investment banker Credit Suisse, says foreclosures were bound to happen.

"Home prices were surging, and everybody was drinking the Kool-Aid, and life was good, and the guys were making tons of money on the mortgage business, and people were making money, investors were flipping [buying and quickly reselling, for profit] houses," she said.

But when the housing market cooled, so did the lenders who were doling out loans to high-risk or sub-prime borrowers. On Tuesday, New Century Financial, the second-largest lender of sub-prime mortgages, ran out of money and said it could no longer afford to make loans. Sharga expects there will be more.

"There have been between 25 and 35 companies who have either gone out of business or have announced plans to go out of business," she said.

As a result, federal regulators are expected to push for tougher lending criteria for mortgage lenders. Melody Hobson, a financial news analyst for ABC News says that could lead to further declines in the housing market.

"It certainly isn't good for the economy,” she says. “Homes have really been holding up this economy, particularly with home equity loans, where people have leaned on using their house. That's drying up."

Economists say the fall in the housing market could lead to job losses, forcing many Americans to cut back on spending, which some say could push the U.S. economy into a recession.