Publication date: 5 October 2007 | Covering: July – September 2007
Quarterly Briefing
- BNP Paribas suspends funds: August 9 BNP freezes three money market funds citing inability to value US subprime mortgage assets; ECB injects €95bn; global credit crisis begins
- Bear Stearns hedge funds: Two Bear mortgage hedge funds collapse July; US$1.6bn investor losses; warning signal missed
- Northern Rock bank run: September 14–17 (FRESH 18 days); Bank of England emergency liquidity; first UK bank run since 1866; government guarantee announced
- Fed surprise 50bp cut: September 18 (FRESH 17 days); FOMC cuts fed funds rate from 5.25% to 4.75%; larger than expected; markets rally; dollar falls
- Dollar weakens: Euro hits US$1.42; Canadian dollar reaches parity; dollar index falls sharply; commodity prices rise
- Housing prices falling: US home prices down 3–5% nationally; subprime foreclosures accelerating; lenders tightening standards dramatically
- Subprime originators fail: American Home Mortgage August 6; over 100 subprime lenders shut in 2007; credit bubble deflating rapidly
- Jamaica: External accounts under some pressure; tourism strong; oil prices rising concern; BOJ rates stable
BNP Paribas August 9; Credit Crisis Begins
The third quarter of 2007 marks the moment most historians of the global financial crisis identify as the starting gun: 9 August, when BNP Paribas announced it was suspending redemptions from three money market funds because it could not reliably value their holdings of US subprime mortgage-backed securities. “The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating,” BNP stated. The ECB responded by injecting €95 billion into the interbank market in a single operation, followed by the Fed and other major central banks, as the interbank lending market seized up. The contagion was immediate and global: credit markets that had been pricing risk at levels reflecting extraordinary complacency suddenly repriced risk dramatically, asset-backed commercial paper markets froze, and financial institutions worldwide began assessing their exposure to US mortgage-related assets. The quarter had already been foreshadowed by the collapse in July of two Bear Stearns hedge funds that had been highly leveraged investors in subprime-related CDOs; the losses to investors of approximately US$1.6 billion were a warning signal that the market had chosen to dismiss.
Fed Surprise 50bp Cut; Northern Rock Run
The Northern Rock bank run of 14–17 September was the most visually dramatic event of the quarter: for the first time in 141 years, customers queued outside a British bank to withdraw their deposits, after the Bank of England’s provision of emergency liquidity support to Northern Rock — a mortgage lender entirely dependent on wholesale funding markets that had frozen — was leaked to the BBC. The panic was only arrested when the government announced a blanket guarantee of Northern Rock deposits. The episode exposed the inadequacy of the UK’s deposit insurance framework and the fragility of business models dependent on continuous access to short-term wholesale funding. Four days later, on 18 September, the Federal Reserve surprised markets by cutting the federal funds rate by 50 basis points — twice the magnitude most expected — from 5.25% to 4.75%. The decision, supported unanimously by the FOMC, reflected the Fed’s assessment that the credit market disruption posed a significant downside risk to economic growth that warranted a forceful preemptive response. Markets rallied sharply but the dollar fell to new multi-year lows.
Jamaica: External Resilience; Mortgage Conditions
Through the third quarter of 2007, Jamaica’s external position was relatively resilient. Tourism arrivals remained strong, supported by capacity expansion in the hotel sector and sustained demand from North American and European visitors. Remittances, while subject to gradual moderation as diaspora incomes were affected by US economic softening, continued to provide significant support to household incomes. Oil prices were rising — crude moved from approximately US$70 to US$80 per barrel through the quarter — adding to Jamaica’s import bill. The Bank of Jamaica maintained relatively stable monetary conditions, and commercial mortgage rates, while elevated, were broadly stable. The NHT’s subsidised rate structure — 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million jointly — remained the primary vehicle for affordable home ownership.
Looking Ahead to Q4 2007
The Fed has cut, the ECB has injected liquidity, and markets have partially stabilised — but the underlying problems in the US housing market and structured credit system remain unresolved. The extent of losses still to be recognised by major financial institutions is unclear, and the potential for further shocks is high. For Jamaica, the US economic outlook and its impact on tourism and remittances will be the key variables as 2007 closes.
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.
Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com
Visit our YouTube Community ↗