The blood bath in the subprime market continues:
Lehman Brothers, the largest U.S. underwriter of U.S. bonds backed by mortgages, announced that it would shut down its subprime lending division and lay off 1,300 employees.
Accredited Home Lenders will shut down more 50% of its mortgage operations, laying off 1,600 employees.
HSBC announced that it plans to close its Indiana office by mid- 2008, with 600 jobs to be gone there.
According to Bloomberg, since the subprime fiasco was first revealed, more than 90 subprime lenders have either ceased operations or are looking for buyers.
Yes, job losses related to the subprime mess will reach 10s of thousands of Americans putting more pressure on the fragile U.S. economy. But it is the defaulting American homeowners that will place the biggest burden on the economy… eventually pushing it into recession.
Two devastating scenarios unfolding:
U.S. consumers who bought homes during the boom days of 2004- 2005 are having difficulty coping with their higher monthly home payments as their home loans are being reset to higher interest rate levels. Problem for this group: If they are having difficulty meeting their monthly payments, their only real alternative to refinance, the subprime loan market, has been shut down.
U.S. homebuilders and homeowners looking to sell homes have an increasingly shrinking pool of potential buyers. Gone are the days when marginal credit worthy homebuyers could qualify for a loan. And other potential buyers, seeing the carnage in the housing market, are waiting on the side lines for prices to fall further.
Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.