Subprime Industry May Face Another Jolt

Although liquidity in the subprime market has improved the past few weeks, the industry could be in for one more jolt.Economist David Jones of Aubrey G. Lanston & Co. said Wednesday that if the International Monetary Fund needs to bail out China next year the event could ripple through to the U.S. capital markets much the way the Russian crisis did this fall. The Russian crisis caused U.S. investors -- particularly hedge funds -- to stop taking risks in the September/October period, Mr. Jones and other economists said. This retrenchment transformed into a credit crunch in which investors turned away from risk, including the purchase of home equity-backed securities and related "B" piece securities. In response to a question from MortgageWire, Mr. Jones acknowledged the problem facing subprime lenders and the asset-backed securities market. He said if an IMF bailout of China occurs, it will mean more trouble for the capital markets in general -- including the home equity and ABS sectors. He said the Russian crisis measures as a "10" on the financial Richter scale while a China IMF bailout would be a "6." Speaking at the semiannual forecast conference of the National Association of Home Builders, he and other economists said interest rates should stay low next year, with the Federal Reserve cutting the discount rate further.