Alabama county, European bank are latest signs of credit market ills
NEW YORK – Faltering credit markets have tipped over into a new and more dangerous phase – and everyone from municipalities trying to get sewers fixed to people shopping for a car loan will be paying the price.
On Thursday, Alabama’s most populous county teetered on the verge of what could become the nation’s largest municipal bankruptcy. A pair of major financial companies said they received default notices from banks nervously looking for loan payments. Reports swirled that Europe’s biggest bank unloaded $24 billion of mortgage securities in a fire sale.
Those on the front lines – from bond traders to investment managers – say the latest batch of bad news indicates a harrowing new time in the credit crisis. And that could send a shockwave through the economy as consumers feel their own versions of the pain.
“We are in historic scarier-than-all-hell territory,” said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. “I am hearing many people say that the market is more broken now than it ever has been.”
Problems are popping up on multiple fronts and all have different implications.
The $2.6 trillion municipal bond industry has not been seriously jolted since Orange County in Southern California filed the biggest government bankruptcy in U.S. history in 1993. Now, the industry faces a whole host of threats that could limit the way cities and school districts raise money.
Alabama’s Jefferson County is considering a bankruptcy filing to resolve a financial crisis surrounding $3.2 billion of sewer debt. The county – the state’s financial center with Birmingham as its seat – is in talks with banks to work out a solution to its liquidity crisis.
Meanwhile, the insurance cities were able to purchase to protect their bonds is losing its luster. Ratings agencies worry a rise in defaults on bonds backed by riskier debt would cost bond insurers so much they would no longer be worthy of their highest ratings. Those pristine ratings are essential to keep bond insurers in business.
Meanwhile, Swiss bank UBS AG did not comment on reports, including one from JPMorgan Chase, that it may have sold a massive portfolio of securities backed by Alt-A loans at a sharp discount. That discount – as much as 30 cents on the dollar – would influence the valuation of similar securities held by other financial institutions.
Many of the largest investment banks are due to report results in two weeks, amid fears of a new round of write-downs.
The troubled Alt-A loans are given to customers with minor credit problems or who lack the documentation to get a traditional, prime loan, while subprime mortgages went to customers with poor credit history.
Paul Lueken, president of 1st Advantage Mortgage in Lombard, Ill, said what has changed as conditions have worsened is how much mortgage loans cost. People who can document their income and have sterling credit can still line up loans to buy homes, he said. The loans just cost more.
In the past few weeks, the “spread” of a home loan’s interest rate over the interest rate on a Treasury bond – a key measure of the cost of a mortgage – has spiked to a 25-year high.
“We’re getting into a much more restrictive underwriting environment,” said Lueken. “The cost of getting a mortgage for everyone is going up. … What we hear is everyone pricing more risk into these loans.”