Wall Street slumps on reports of risky U.S. home lending and mortgages

There have been more heavy falls on Wall Street this morning as nervous investors watch the continuing shakeout of risky housing loans in the US mortgage market.

The Dow Jones Industrial Average closed 1.9 per cent weaker as a report showed late payments and foreclosures on mortgages rose to their highest level in four years.

The biggest fallout has been in what's known as 'subprime mortgages'.

Here's more from our Business Editor, Peter Ryan.

PETER RYAN: The term 'subprime mortgage' is banking jargon in the United States for a risky loan.

They're designed for people with poor credit histories who ultimately pay higher interest rates and line the pockets of lenders who've been making billions of dollars from the housing boom.

But as interest rates in the United States creep up from historic lows, homeowners who are mortgaged to the hilt are starting to hurt.

ELLEN SCHLOEMER: The major problem is the impact that it's having on consumers who are struggling to try to find a way to refinance really bad loans that they got a couple of years ago.

PETER RYAN: Ellen Schloemer from the Center for Responsible Lending in North Carolina says a human crisis is looming as mortgage providers call in their loans.

And she believes borrowers are not necessarily to blame, and that the US banking industry has been exploiting the dream of home ownership for low-income Americans.

ELLEN SCHLOEMER: Lenders had adopted many practices, a very loose underwriting, they were qualifying people for these mortgages at, you know, 50, 60 per cent of their income for their monthly payment, and this is at sort of an artificially low rate, and they were also sort of neglecting to tell borrowers they had to put aside money for taxes and insurance as well.

So, much of the problem consumers are facing now is fault of the lenders.

PETER RYAN: In a report out today, the Mortgage Bankers Association said 14 per cent of subprime borrowers were now delinquent in their payments, the highest level in four years.

The hit mortgage stocks on Wall Street and contributed to the day's heavy falls.

But market watchers say no one should be surprised, and that a time bomb has been ticking for the past few years.

DOUG KASS: We've seen this fungus of subprime credits growing in scope and also in economic consequence over the last three years, yet it's been ignored by the markets.

PETER RYAN: Doug Kass of Seabreeze Investment Partners has been monitoring the fallout and believes it could eventually rock the US economy.

DOUG KASS: It's my view that we're beginning to experience a full-blown bursting of the latest asset bubble, which could prove even more devastating than the piercing of the NASDAQ bubble in 2000.

The impact of the subprime collapse on the availability of mortgage credit, and in turn, consumer spending, is really the primary reason why I believe our economy, the domestic US economy and our corporate profits in 2007 and 2008 will materially disappoint vis-a-vis most expectations.

TONY EASTLEY: Doug Kass of the American investment house Seabreeze Partners, ending that report from Business Editor Peter Ryan. SOURCE: © 2007 Australian Broadcasting Corporation