From the New York Times:
Countrywide Financial, the nation’s largest mortgage lender, said yesterday that more borrowers with good credit were falling behind on their loans and that the housing market might not begin recovering until 2009 because of a decline in house prices that goes beyond anything experienced in decades.
The news from Countrywide, widely seen as a bellwether for the mortgage market, initiated a sell-off in the stock market, which is at its most volatile in more than a year. The Standard & Poor’s 500-stock index fell 30.53 points, or 2 percent, to 1,511.04, its biggest one-day drop in nearly five months. The dollar dropped to a new low against the euro, edging closer to $1.40 to 1 euro. Stocks opened sharply lower in Japan this morning.
The slumping housing market has become the biggest worry for the stock market, which just four days ago set records, because of its potential impact on the broader economy and financial system.
Countrywide’s stark assessment signaled a critical change in the substance and tenor of how housing executives are publicly describing the market. Just a couple of months ago, some executives were predicting a relatively quick recovery and saying that most home loans would be fine with the exception of those made to borrowers with weak credit who stretched too far financially.
Executives at Countrywide had for some time been more skeptical than others but the bluntness of their comments yesterday surprised many on Wall Street. In a conference call with analysts that lasted three hours, Countrywide’s chairman and chief executive, Angelo R. Mozilo, said home prices were falling “almost like never before, with the exception of the Great Depression.”
Nationally, home prices have not fallen in the 35 years or so that the government and private services have tracked them. Some researchers like Robert J. Shiller of Yale have compiled data that goes as far back as 1890 and shows that home prices fell for several years during the 1930s.
Mr. Mozilo said that because of a large number of homes on the market, the housing sector would continue to suffer until sometime in 2008 and not begin recovering until 2009.
“Where you will see prime borrowers have trouble is where they took the riskiest of adjustable-rate mortgages and put nothing down with a first and second combined,” Thomas Lawler, a housing economist, said.
Many of Countrywide’s home equity loans were second mortgages made to people who were financing the full or nearly full cost of their homes. These loans are particularly risky because when house prices are falling and a home is foreclosed and resold, the holder of the first lien is paid off and often there is little left to apply to the second mortgage.
“Countrywide is highlighting what is an industrywide problem,” said Christopher C. Brendler, an analyst with Stifel Nicolaus, an investment firm in St. Louis. A second mortgage “is really an unsecured loan like a credit card.”