Publication date: 5 July 2007 | Covering: April – June 2007
Quarterly Briefing
- New Century bankruptcy: April 2 largest subprime mortgage lender files Chapter 11; shares had been suspended March 8; 7,200 jobs lost; subprime rout accelerates
- Bear Stearns hedge funds: Two internally managed mortgage hedge funds face margin calls in June; creditors seize assets; rescue attempts collapse; losses mount
- Fed holds at 5.25%: Bernanke’s Fed keeps rates unchanged since June 2006; inflation concerns balance growth risks; housing weakness not yet systemic to Fed’s view
- Subprime spreads: Over 100 subprime lenders have now closed or restricted operations since 2006; ABX index (subprime MBS benchmark) falls sharply
- US housing: Existing home sales declining; inventories rising; prices flat to slightly negative; “contained” language from Bernanke raising questions
- iPhone launch: June 29 (FRESH 6 days); Apple’s first smartphone transforms mobile computing; stock market event; Silicon Valley exuberance
- China stock market volatility: Shanghai Composite surges and corrects; regulatory tightening; international spillover fears
- Jamaica: Strong tourism; NHT active; commercial rates high; housing demand from middle-income segment
New Century Falls; Subprime Crisis Deepens
The second quarter of 2007 saw the subprime mortgage crisis move from background concern to acute stress. New Century Financial Corporation, the second-largest subprime mortgage originator in the United States, filed for Chapter 11 bankruptcy protection on 2 April, having had its stock suspended on the NYSE since 8 March amid mounting loan losses and a criminal investigation. The failure cost 7,200 jobs and wiped out billions of investor value. New Century was the most prominent casualty of a wave of subprime lender failures: more than 100 subprime and alt-A mortgage originators had closed or curtailed operations since the market began to deteriorate in 2006. The ABX index, which tracked the value of subprime mortgage-backed securities, continued to fall through the quarter, signalling the market’s growing expectation of losses far beyond what had been anticipated. By June, two internally managed Bear Stearns hedge funds — the Bear Stearns High-Grade Structured Credit Strategies Fund and its enhanced leverage version — were facing catastrophic losses on their holdings of collateralised debt obligations backed by subprime mortgages. Creditors began seizing and liquidating assets; rescue attempts failed. The funds effectively collapsed, representing losses of approximately US$1.6 billion for investors and signalling that the subprime contagion was reaching the core of Wall Street.
Fed Holds; Bernanke’s “Contained” Assessment
Throughout the quarter, the Federal Reserve maintained the federal funds rate at 5.25%, unchanged since June 2006. Fed Chair Bernanke, in congressional testimony in March, had described the subprime crisis as likely to be “contained” and not to pose broader systemic risk — an assessment that subsequent events would prove dramatically wrong, but which reflected the information available at the time and the genuine difficulty of predicting how interconnected structured finance markets would behave under stress. The Fed’s inflation mandate continued to argue against easing: core PCE inflation remained above 2%, and the economy outside housing appeared to be growing solidly, with unemployment low and corporate earnings robust. The housing market’s deterioration was visible — existing home sales were declining, inventories rising, and prices flat to slightly negative — but the broader economic impact had not yet clearly manifested. The iPhone launch on 29 June generated enormous consumer and investor excitement, illustrating the extraordinary contrast between the technology sector’s exuberance and the financial sector’s gathering storm.
Jamaica: Tourism Strong; Mortgage Conditions
Jamaica’s economy in mid-2007 remained in relatively good shape, with tourism arrivals performing well and remittance inflows providing household income support. The NHT was active in its core mission of providing subsidised mortgages for Jamaican workers, with 0%, 2%, and 4% rate offerings on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings. Commercial mortgage rates remained elevated relative to these subsidised tiers, reflecting Jamaica’s broader interest rate environment. Middle-income Jamaicans who did not qualify for NHT’s lowest tiers but aspired to homeownership faced the challenging intersection of high commercial rates and constrained housing supply in desired urban and suburban locations. The construction sector was active in the upper-end and hotel segments, but affordable housing remained an unmet need.
Looking Ahead to Q3 2007
The Bear Stearns hedge fund situation is unresolved and the contagion potential from subprime into broader credit markets is a growing concern, though the Fed still considers the situation “contained.” Summer is traditionally a quieter market period, but the structured finance market’s difficulties — funding strains, CDO repricing, lender failures — suggest the potential for further disruption. For Jamaica, the question is whether US economic softening begins to erode tourism demand in the second half of 2007.
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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