Stocks fall on mortgage defaults

NEW YORK (Reuters) - Stocks fell for a third straight session on Friday as concern over rising defaults in the subprime mortgage industry drove down financial services shares and the price of oil hit a 2007 high.

Shares of NovaStar Financial Inc. NFI.N and New Century Financial Corp. NEW.N, two of the major names in the business of making home loans to Americans with shaky credit, extended declines from earlier in the week. That trend spilled over to bigger names in the home loan business like Countrywide Financial Corp. CFC.N, Wells Fargo & Co. (WFC.N) and even blue-chip JPMorgan Chase & Co. (JPM.N)

Shares of Microsoft Corp. (MSFT.O) were the top-weighted drag on the S&P 500 and the Nasdaq Composite after a U.S. federal jury found the software maker infringed on audio patents held by Alcatel-Lucent and should pay $1.52 billion in damages.

Adding to jitters in the market, Vice President Dick Cheney said on Friday the United States retains all options in keeping Iran from acquiring nuclear weapons. But the White House stressed it was seeking a diplomatic solution.

"Oil rising above the $61 level will put a cap on the market for the short term," said John O'Brien, a trader at MKM Partners LLC in Cleveland, Ohio. "For financials, it's the fear of the subprime loan and the worry over how much a piece of their book relates to more exotic-type loans."

Subprime mortgages are the riskiest part of the U.S. home loan market, serving borrowers with poor credit histories at higher-than-average interest rates. Default rates have risen as the U.S. housing market has seen slowing sales and falling prices.

The Dow Jones industrial average .DJI fell 38.54 points, or 0.30 percent, to end at 12,647.48. The Standard & Poor's 500 Index .SPX dropped 5.19 points, or 0.36 percent, to finish at 1,451.19. The Nasdaq Composite Index .IXIC lost 9.84 points, or 0.39 percent, to close at 2,515.10.

For the week, the Dow fell 0.9 percent, its worst decline since August. The S&P 500 finished the week down 0.3 percent. But the Nasdaq marched to its own drummer and ended the week up 0.8 percent.

On the Nasdaq, Microsoft shares slid 1.7 percent, or 49 cents, to $28.90.

CRY, MY BELOVED COUNTRYWIDE

Shares of mortgage lenders continued to slide for a third straight day. The stock of Countrywide Financial Corp. CFC.N, the top U.S. mortgage lender, fell 2 percent, or 81 cents, to $39.33 on the New York Stock Exchange. Shares of Washington Mutual (WM.N), the largest U.S. savings and loan, dropped 1.9 percent, or 84 cents, to $43.88.

NovaStar Financial's stock fell 9.2 percent, or 86 cents, to $8.48, while New Century Financial's stock lost 6.2 percent, or $1.02, to $15.52 in NYSE trading. They ranked near the top of the list of the Big Board's biggest percentage losers.

The S&P Financial Index .GSPF was down 1.1 percent, its sharpest decline since January 25.

Bank of America Corp. (BAC.N) shares slid 1.6 percent, or 84 cents, to $52.86, while Wells Fargo's stock dropped 1.6 percent, or 58 cents, to $35.63. They were among the biggest decliners in the S&P 500.

Shares of JPMorgan Chase & Co. (JPM.N) ranked as the second-biggest decliner in the Dow, falling 1.2 percent, or 61 cents, to $51.03 on the NYSE.

OIL ENDS OVER $61 AT 2007 HIGH

U.S. crude oil for April delivery gained 19 cents to settle at $61.14 a barrel on the New York Mercantile Exchange, the highest NYMEX closing price in nine weeks. Earlier, the NYMEX April crude futures contract hit a session high at $61.80.

Sharply higher oil prices usually send chills down stock investors' spines because they increase worries about rising inflation as well as higher borrowing costs for corporations and consumers.

The jump in oil prices gave investors a reason to buy shares of energy producers. Chevron Corp. (CVX.N) shares rose 0.6 percent, or 40 cents, to $71.07 and ConocoPhillips (COP.N) climbed 0.5 percent, or 32 cents, to $67.20, both in NYSE trading.

Exxon Mobil Corp. (XOM.N) added 0.2 percent, or 14 cents, to close at $75.22 on the Big Board. The energy sector's advance helped limit the declines in both the blue-chip Dow average and the S&P 500.

WHEN SAFETY LOOKS SEXY

But the worries about the troubled subprime mortgage market's impact on the banking sector and the U.S. economy as well as the saber rattling over Iran sent investors running for the safety of U.S. Treasury bonds. The price of the benchmark 10-year U.S. Treasury note shot up 14/32 in price to 99-19/32, while its yield fell to 4.68 percent on Friday from 4.73 percent late on Thursday.

Since bond yields move inversely to their prices, the rally in the bond market pushed Treasury yields lower and increased the allure of utility stocks.

Shares of power company Dynegy Inc.(DYN.N) gained 2.5 percent, or 20 cents, to $8.28 and shares of TXU Corp. TXU.N, the largest power company in Texas, rose 4.1 percent, or $2.38, to $60.02.

The Dow Jones Utility Average .DJU rose nearly 1 percent.

Shares of No. 2 U.S. home improvement chain Lowe's Cos. Inc. (LOW.N) soared to a record at $35.74 after it reported a quarterly profit that beat forecasts even as a slowing U.S. housing market hurt sales.

Lowe's shares closed at $34.93, up $1.30, or 3.9 percent on the New York Stock Exchange.

Trading was moderate on the NYSE, where about 1.45 billion shares changed hands, below last year's estimated daily average of 1.84 billion. On the Nasdaq, about 2.08 billion shares traded, above last year's daily average of 2.02 billion.

Decliners outnumbered advancers by a ratio of about 9 to 8 on the NYSE and, on the Nasdaq, by about 9 to 7.