Another Casualty in Mortgage Arena

It was just a matter of time before heads rolled at Bear Stearns Co. This was only to be expected after Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, valued at about $638 million and the High-Grade Structured Credit Fund, worth about $925 million lost their value in July.

The casualty was co-President and co-Chief Operating Officer Warren Spector, he resigned last week. In an announcement, CEO James Cayne cited the performance of the two valueless funds as a main reason for the restructuring in management. Spector started his career as a trader at Bears Stearns in 1983 and was considered the likely successor to Cayne.

The funds collapsed as home loan mortgages made to unqualified borrowers began to default. Similarly mortgaged back bonds lost value amid increased foreclosures and mortgage defaults. This led Standard & Poors to consider lowering the company's credit rating, making borrowing money more expensive for the 84 year old investment banking firm.

The domino effects of the housing market are cascading through various areas of the economy. It may get worse in the foreseeable future. Even people with good credit have been defaulting on their mortgages leading to the conclusion that things are much worse than portrayed in the media.

As a result many mortgage lenders and mortgage brokers no longer offer no-money-down mortgages.This can have a pronounced effect on the recovery of the housing market. Still homebuyers are on the sidelines, sales of existing homes fell in June while prices rose discreetly.

However, the National Association of Realtors offered a contrarian outlook. It predicted that home prices will recover in 2008 while existing home sales will increase in the fourth quarter with new home sales picking up in the beginning of next year.

The latest results show that new home sales fell 6.6 percent in June. New home sales are considered a leading indicator of market demand because sales figures are known immediately when a contract is signed; unlike existing home sales where the information is recorded a few weeks after closing.

Rising mortgage interest rates, oversupply, tightening mortgage lending practices, and rising home loan defaults combine to form a potent mix that can affect the recovery of the economy. The economy will likely grow between 2.5% - 3% for the rest of the year, another casualty of the housing market.