Publication date: 5 April 2007 | Covering: January – March 2007
Quarterly Briefing
- Fed holds at 5.25%: Bernanke’s first full year; rates unchanged since June 2006; Fed language balanced between inflation risk and housing weakness
- HSBC subprime warning: February 7 HSBC announces US$10.6bn provision for US subprime mortgage losses; first major bank to quantify exposure
- China flash crash: February 27 Shanghai Composite falls 9% in one day; triggers global selloff; S&P drops 3.5%; brief panic; markets recover
- Iran seizes British sailors: March 23; 15 Royal Navy personnel held 13 days; diplomatic crisis; oil risk premium adds to energy prices
- New Century Financial distress: March 8 NYSE suspends trading; stock had fallen 90%; restatements; criminal probe; largest subprime lender in crisis
- US housing: Existing home sales fell 8.4% in 2006; January inventory at 6.8-month supply; prices slightly negative year-on-year; correction underway
- Dow Jones: Hits 12,000 milestone January; equities resilient despite housing concerns; earnings strong outside financials
- Jamaica: Economy growing modestly; tourism sector expanding capacity; NHT lending active; commercial rates stable-to-high
HSBC Subprime Warning; New Century in Crisis
The first quarter of 2007 brought the first clear public warnings that the US subprime mortgage market’s deterioration would produce losses far larger than the market had anticipated. On 7 February, HSBC — the British-based banking giant that had acquired the US subprime lender Household Finance in 2003 — announced it was taking a provision of US$10.6 billion against US mortgage losses, significantly larger than market forecasts. It was the first quantification of major subprime losses by a large international bank, and it changed the narrative: the subprime problem was not a niche issue confined to specialist lenders but had infected the balance sheets of globally systemic institutions. New Century Financial, one of the largest subprime originators, was already in deep trouble: the NYSE suspended trading in its stock on 8 March as the company disclosed it had received a federal grand jury subpoena and was restating financial results, having massively underestimated loan repurchase obligations. The stock had fallen approximately 90% from its high. New Century would file for bankruptcy in April. Despite these warning signs, broader financial markets remained relatively calm through the quarter: the Dow Jones continued to rally, and the Federal Reserve held rates steady at 5.25%, maintaining its balanced assessment of inflation and growth risks.
China Flash Crash; Iran Crisis; Fed Holds
On 27 February, the Shanghai Composite Index fell 9% in a single session — the largest single-day percentage decline in a decade — triggered by fears of government regulatory tightening after years of extraordinary appreciation in Chinese equities. The selloff rippled globally: the S&P 500 fell 3.5% in its largest single-day decline since the September 2001 terrorist attacks, and markets in Europe and Asia also sold off sharply. The recovery was rapid, and the episode was soon dismissed as a technical correction rather than the precursor to a sustained bear market — which it ultimately was not. In late March, Iran’s Revolutionary Guard seized fifteen British Royal Navy personnel operating in disputed waters of the Shatt al-Arab waterway, triggering a diplomatic crisis that lasted thirteen days before the sailors were released. The episode added a geopolitical risk premium to oil prices, already elevated by ongoing concerns about Iran’s nuclear programme and broader Middle East instability.
Jamaica: Growth Continues; Mortgage Conditions
Jamaica’s economy was growing modestly in early 2007, with tourism capacity expanding through new hotel developments and continued arrivals growth. The NHT was active across its lending programmes, providing subsidised mortgages at 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings — the most accessible route to homeownership for Jamaican workers. Commercial mortgage rates remained high relative to international benchmarks, reflecting Jamaica’s domestic monetary policy environment and the high public debt service burden that constrained room for interest rate reduction. Housing construction activity in the formal sector was concentrated in the upper-income and tourism-adjacent segments, while affordable housing demand continued to outpace supply in Kingston, Montego Bay, and Portmore.
Looking Ahead to Q2 2007
New Century’s imminent bankruptcy and the accelerating closure of subprime lenders suggest that the US housing correction has further to run. Whether the damage remains contained to the subprime segment or spreads to the broader mortgage market and financial system is the critical question for 2007. For Jamaica, sustained tourism growth and remittance flows should support the economy, but rising energy costs and global financial uncertainty present headwinds.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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