Mortgage Market: Subprime Mortgage Reports Show Increasing Troubles

by Amy Lillard

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

A flurry of news this week suggests that the eventual toll of the subprime market collapse could reach much farther than anticipated, or dreaded.

Bank of America announced a drastic personnel cut of 3,000, along with a replacement in the C-suite. In addition to the layoffs, the bank also reported its net income declined $1.18 billion dollars, or 82 cents per share.

Merrill Lynch, the storied brokerage firm, reported its first quarterly loss in almost six years. The company lost $2.24 billion, or $2.82 a share. Revenue fell a staggering 94 percent, down to $577 million from $9.83 billion last year.

Existing home sales took a tumble in September, marking the worst housing industry slump in 16 years. The National Association of Realtors said sales fell 8 percent, while industry watchers had expected a 4.5 percent decline.

Analysts point to the turmoil that hit markets in August as the leading factor, resulting in a drying up of jumbo mortgages ($417,000 or more) crucial to high-cost areas such as California.

The seasonally adjusted sales rate translated to 5.04 million existing homes, the slowest pace on record. In addition, median prices dropped 4.2 percent from last year. The sales drop was the 13th sales decrease in the past 14 months.

Simultaneously, the National Association of Realtors announced an unexpected gain the sale of new homes. In September, these sales rose 4.8 percent. Analysts expected sales of new homes to fall 2.5 percent to be on pace with the August rate.

While the increase appeased some, many still pointed to the bad news: new home sales figures for September were still 23.3 percent below last year's rate.

With all these reports and announcements in mind, economists now say the mortgage market troubles could cost financial firms and investors up to $400 billion. The savings and loan crisis of the early 1990s, in comparison, cost financial firms and investors $240 billion (adjusted for inflation).