Subprime Loan Worries Hammer Stocks Tuesday; Delinquency Rate Near 5%

The Dow Jones Industrial Average lost 242 points, or 2%, yesterday as fears of a subprime mortgage meltdown filtered through to financial stocks, sparking a mass sell-off.

The Mortgage Bankers Association announced Tuesday that home foreclosures stood at a record 0.54% in the fourth quarter of 2006.  The delinquency rate for the quarter also rose to 4.95% from 4.67% in the third quarter.  The vast majority in the increase came from subprime mortages.

This led to a mini-panic for financial stocks on Wall Street as investors moved money out of banks that had high exposure to subprime loans.  Stocks like American Express, Citigroup, and JP Morgan Chase – all Dow components – lost at least 3% on Tuesday. GM also lost ground on the subprime impact of financing unit GMAC.

"The subprime issue is a little more contagious than people thought and it is spreading some fear in the market," Jay Susskind, director of trading at Ryan Beck & Co, told MarketWatch.

Not helping the stock market’s case was another report indicating weaker-than-expected retail sales. Combined with the worries of mass-default on high-value loans, some analysts were downtrodden.

"I worry in terms of the bigger picture," said Barry Hyman, market strategist at EKN Financial. "There are now risks to economic growth and therefore risks to earnings growth."

In early trading Wednesday, the Dow was primarily flat, but gaining some ground from the previous day’s losses.