NEW YORK -- U.S. financial markets were rattled by news on Tuesday that late payments on U.S. mortgages had reached their highest level in 3-1/2 years, while regulators began a probe of subprime mortgage lending and called for legislation.
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U.S. lenders specializing in making loans to high-risk borrowers have been struggling with rising defaults and foreclosures on home mortgages as home prices began to fall in the past year after interest rates rose in 2005.
U.S. stocks fell sharply and bond prices rose on Tuesday after the Mortgage Bankers Association reported delinquencies rose in 49 states and among all loan types in the fourth quarter of 2006, with the steepest increase in defaults seen in subprime adjustable-rate loans.
The industry association also revised its forecast for when the U.S. housing sector will recover until late 2007 from mid-year.
The major U.S. stock market indexes, the Dow Jones industry average, Nasdaq Composite Index , and Standard and Poor's 500 Index, each fell about 2.0 percent as investors sold riskier assets.
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A weaker-than-expected report on U.S. retail sales growth for February also suggested the U.S. economy may be slowing and gave investors additional incentive to sell stocks.
Stocks hit hardest included those of major Wall Street lenders, commercial lenders, and thrifts with exposure to the mortgage sector, such as Bear, Stearns Cos., Countrywide Financial Corp., JPMorgan Chase & Co. and Washington Mutual Inc..
The flight from riskier assets to safer bets like government bonds helped drive up U.S. Treasury debt prices.
In the foreign exchange market, the dollar fell against the yen and the Swiss franc, as nervousness in financial markets spurred renewed unwinding of so-called carry trades in which investors borrow in low-yielding currencies such as Japanese yen or Swiss franc and buy higher-yielding currencies or securities.
The market meltdown among the subprime lenders themselves broadened as shares of Accredited Home Lenders Holding Co. lost two-thirds of their value, and the stock of New Century Financial Corp. sank, with investors fearing the lenders would both run out of cash.
The San Diego, California-based Accredited said it needed to raise money after paying $190 million demanded by its own creditors, and said it was cutting an unspecified number of jobs and was exploring "strategic options," including raising new capital.
Trading in New Century stock was suspended by the New York Stock Exchange prior to delisting. The Irvine, California-based company also said it had received a notice from the U.S. attorney for the Central District of California that it was the subject of a criminal probe of trading in its securities.
Massachusetts Banking Commissioner Steven Antonakes ordered New Century to fulfill its promises on loans in progress and stop taking new loan applications. The state regulator said he was coordinating his order with several other states, including New York, New Jersey and New Hampshire.
New Century's delisting was foreshadowed on Monday when it said it did not have enough cash to repay its own lenders.
"There's not going to be many subprime lenders left," said Blake Howells, director of research at Becker Capital Management in Portland, Oregon, which invests $2.5 billion.
Other subprime lenders whose stocks fell were NovaStar Financial Inc. of Kansas City, Missouri; Impac Mortgage Holdings Inc. of Irvine, California; and IndyMac Bancorp Inc. of Pasadena, California.
GMAC LLC, a lender owned by General Motors Corp. , and Cerberus Capital Management LP, said its ResCap mortgage unit posted a $651 million fourth-quarter loss and had sharply reduced its exposure to non-prime loans.
In another development in the subprime sector's reversal of fortune, Massachusetts said it had subpoenaed documents from UBS Securities LLC and Bear Stearns concerning research analysis on subprime lenders, including New Century.
UBS declined to comment on the matter. Bear, Stearns officials could not be reached immediately for comment.
State Secretary William Galvin said in a statement that several Massachusetts communities had been hurt by foreclosures on subprime lender mortgages.
In Washington, Rep. Barney Frank, the chairman of the House Financial Services Committee, said he planned to introduce legislation that would restrict overly risky mortgages at a time when the subprime market was in turmoil.
But the Massachusetts Democrat also said he did not think the subprime troubles posed any broad threat to the U.S. banking system.
The U.S. Treasury's financial markets chief also played down fears the subprime crisis would spread.
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"We are monitoring it carefully and feel for the most part it's fairly well contained within that portion of the overall mortgage market, certainly within the overall capital market," Anthony Ryan, assistant Treasury secretary for financial markets, told Reuters.
Ryan, speaking on the sidelines of a Treasury Department conference on U.S. capital markets, said officials would continue to monitor and evaluate the situation.
Just under 15 percent of U.S. mortgages at the end of 2006 were subprime loans, according to estimates by First American LoanPerformance, the San Francisco-based mortgage data and analytics unit of First American Corp.
Senior members of the Senate Banking Committee said Congress may have to look at the the risks big banks face from investing in subprime mortgages and whether those institutions have properly disclosed the costs to their shareholders.
A mortgage insurer said the home finance industry became overly aggressive in recent years, with many lenders willing to overlook the weak credit histories of many applicants.
"We had said for a while that the market was underpricing risk. We thought there was more risk out there than some folks were thinking." said Beth Haiken, a spokeswoman for Walnut Creek, California-based mortgage insurer The PMI Group Inc. . PMI has trimmed the share of its loan portfolio composed of subprime mortgages to about 8.0 percent from 11.0 percent in 2004.
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