Fears of Us Mortgage Crisis As Homeowners Face 12% Interest

The US central bank was coming under pressure last night to underpin the country's troubled housing market as fresh figures showed an increasing number of US homeowners falling behind with their mortgage payments and having their properties repossessed.

The problems had a knock-on effect on Wall Street where the Dow Jones Industrial Average fell more than 200 points by lunchtime amid fears the malaise in the housing market would infect the rest of the economy.

There were signs of mounting problems for firms that have aggressively sold home loans to people with poor credit ratings - so-called sub-prime mortgages.

The US Mortgage Bankers Association (MBA) yesterday pushed back its forecast of a rebound in the real estate market from the middle of 2007 until the end of the year after reporting an increase in both late payments and foreclosures in the final three months of 2006.

It said defaults had risen for all loan types but were particularly marked for those with sub-prime mortgages with adjustable rates.

Borrowers with loans totalling $265bn (£137bn) are scheduled to have the interest rates on their mortgages reset this year and many of the poorest homeowners in the US could face interest rates as high as 12%. The Fed meets next week to set base interest rates but is expected to leave them unchanged at 5.25% despite the latest mortgage default figures and separate data yesterday showing weak retail sales.

Research by the Center for Responsible Lending has predicted that one in five of the sub-prime mortgages made in the past two years will end in foreclosure, resulting in the biggest crisis for the mortgage market in modern times.

The centre said 2.2m sub-prime home loans had already failed or would end in foreclosure and that the losses to homeowners could be as high as $164bn. The areas at highest risk were California, Nevada, New York, New Jersey, Michigan and Washington DC, it said.

The data from the MBA yesterday showed total mortgage defaults up from 4.67% to 4.95%, but sub-prime delinquencies rose from 12.56% to 13.33%. One in seven adjustable rate sub-prime mortgages is in default, up from one in 10 a year and a half ago.

The problems have most clearly been illustrated by New Century Financial, which is on the brink of bankruptcy without enough cash to repay its own lenders. Its share have been suspended by the New York Stock Exchange and it has admitted receiving a grand jury subpoena as part of a criminal inquiry into trading in its shares as well as accounting errors.

Yesterday, the attention turned to Accredited Home Lenders. Its shares fell 60% after it was forced to admit it might need to raise more cash after paying out $190m to its lenders.

More than 12 lenders have left the industry in the last year but while HSBC, Britain's biggest bank, has run into difficulties with its mortgage business in the US - forcing the first profits warning in its history - it has insisted these are not people in the sub-prime category.

Nick Parsons, head of markets strategy at the National Australia Bank in London, said: "Loan standards may now be improved but this will effectively tighten both the quantity and price of available credit. In other words, we are about to witness tightening into a downturn.

"Against a background of near-static retail sales growth and faltering consumer confidence, it is hard to see how this can be good for asset markets more generally."

Other sub-prime lenders also suffered share falls yesterday, including Kansas City, NovaStar Financial, Impac Mortgage Holdings and IndyMac Bancorp.