Subprime woes seen worsening if oil hits borrowers

NEW YORK (Reuters) - Troubles buffeting the U.S. mortgage market could get worse as resurgent crude oil prices squeeze the finances of already hard-pressed borrowers, analysts say, and that could spell more trouble for Wall Street.

The fallout from the subprime mortgage lending industry, which lends to riskier borrowers with spotty credit histories, could even trigger a long-anticipated correction in the U.S. stock market, they said.

“The subprime borrower is the one who would be hurt the most if gas and heating oil prices went up further,” said Jim Awad, chairman of Awad Asset Management in New York.

“The thinking is that if you are going to have a spike in energy prices here, it would hurt the poor consumer who is already at risk.”

For the stock market, he said, the further hits to the mortgage markets “could give you the excuse for a correction.”

Many subprime borrowers with are already grappling with rising interest rates on their adjustable-rate mortgages, and the subprime sector has been hit hardest by the recent downturn in housing values.

That combination has driven up mortgage delinquencies, along with weakened underwriting standards that left many homeowners with mortgages they could not afford.

On Friday, investors pummeled shares of subprime lenders further, with shares of New Century Financial Corp. NEW.N and NovaStar Financial Inc. NFI.N extending declines seen earlier in the week.

The sell-off, which came as U.S. crude for April delivery CLc1 rose above $61 a barrel, a 2007 high, sent the S&P Financial index .GSPF to its biggest slide in a month.

During the session, crude peaked at $61.80 a barrel, a jump which analysts said could dissuade the Federal Reserve from contemplating a cut in benchmark U.S. interest rates.

Until recently oil prices had been declining, creating a cushion for hard-pressed homeowners.

“Declining gas prices had offset the drag on confidence and spending that came from the slowdown in housing,” said Hugh Johnson, chief investment officers at Johnson Illington Advisors, in Albany, New York. “Now that oil prices are edging higher it means (the market and the consumer) won’t get that helping hand.”

H&R Block Inc. HRB.N is among companies that have brought the subprime mortgage woes into sharper focus as the largest U.S. income tax preparer posted a quarterly loss on Thursday, blaming fallout from a subprime mortgage unit it has put up for sale.

In addition, Impac Mortgage Holdings Inc. IMH.N, which makes some loans to borrowers with weak credit, or subprime borrowers, but focuses on loans to people without enough documentation to get prime loans, posted a $64 million quarterly loss on Friday amid defaults and writedowns of mortgage holdings.

Shares of Impac fell 3.4 percent to end at $7.32, while shares of New Century declined 6.2 percent $15.52 and NovaStar Financial slid 9.2 percent to $8.48.

The disappointing news follows HSBC Holdings Plc's HSBA.LHBC.N warning on February 7 that rising loan defaults in its U.S. subprime mortgage lending business would force it to put aside about $10.6 billion to cover bad debts for 2006.

“The subprime market is under tremendous pressure,” Awad said.

Additional reporting by Jennifer Coogan