Freefall in US mortgage lenders' shares deepens

By Dan Wilchins

NEW YORK (Reuters) - Subprime mortgage companies' shares dropped on Friday, extending more than two weeks of declines and triggering slumps in many finance companies' shares, sending investors to the perceived safety of U.S. Treasuries.

The decline came after Impac Mortgage Holdings Inc. IMH.N posted a $54 million quarterly loss amid defaults and write-downs.

A series of subprime lenders, which make loans to people with weak credit, have reported losses amid rising delinquencies recently.

"There's so much fear and loathing and panic in the subprime mortgage sector," said Howard Shapiro, a portfolio manager at KBW Asset Management in New York, which has positions in several mortgage lenders.

Shares of Impac, which makes some subprime loans but focuses on borrowers who can't provide enough documentation to get prime loans, fell as much as 5.3 percent on Friday.

Shares of subprime lender NovaStar Financial Inc. NFI.N, which on Tuesday said mounting losses may cause it to give up its tax-friendly real estate investment trust status, fell as much as 9.9 percent and have lost about half their value this week.

Concerns about the mortgage sector hemorrhaged into Treasuries, where prices rose and yields fell on the benchmark U.S. 10-year Treasury note. The risk of default soared, as measured by derivative indexes that gauge the cost of protecting bonds backed by 2006 subprime loan against default.

Other decliners included Lehman Brothers Holdings Inc. LEH.N and Bear Stearns Cos. BSC.N, investment banks perceived as having large exposure to the mortgage market.

Share weakness even extended to Fannie Mae (FNM.N) and Freddie Mac (FRE.N), quasi-governmental companies that help fund mortgages, though neither has extensive subprime exposure.

"There's no evidence of this yet, but the risk is that subprime is not just an isolated example of overstretched lending, but the first crack in a broader problem in credit in market," said Bob Albertson, chief strategist at Sandler O'Neill in New York.

FEAR, LOATHING AND LOSSES

Subprime concerns began on February 7, when HSBC Holdings Plc (HSBA.L)(HBC.N) Europe's biggest bank, said its bad debt charge would be more than $10.5 billion for 2006, and lender New Century Financial Corp. NEW.N projected a surprise fourth-quarter loss.

Mortgage delinquencies and defaults are rising as adjustable-rate mortgages reset higher and home price appreciation slows, and after weakened underwriting standards left many homeowners with home loans they could not afford.

A series of privately-held mortgage lenders, including ResMae Mortgage Corp. and Ownit Mortgage Solutions Inc. have filed for bankruptcy in recent months.

But stock investors may be overreacting, analysts said. Even lenders with minimal subprime exposure, such as American Home Mortgage Investment Corp. AHM.N, are selling off.