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Signs Are Pointing South on Wall St.

Bond Yields Fall
SOURCE: Bloomberg News | The Washington Post - November 27, 2007

Just a month ago, financial markets seemed to be healing from the tumult of the summer, when fear of losses in the mortgage sector caused many markets to effectively shut down. But throughout November, the very institutions that were expected to ease the blow to the economy have shown more evidence of trouble.

Investors are worried that major banks are suffering such severe losses from mortgage and other risky securities that they will not be able to lend as much money to consumers and businesses in the months ahead. The same fears apply to Fannie Mae and Freddie Mac, the government-sponsored housing finance companies.

"It looked like the problems in the credit markets were going away or at least calming down a few weeks ago," said David A. Wyss, chief economist of Standard & Poor's. "Now the signs are that they're not."

The credit problems are no abstraction. They make it more expensive for individuals to obtain mortgages and for businesses to expand.

Higher interest rates for risky mortgages, for example, could make it difficult for would-be buyers to afford a home, which could cause prices to drop further. That, in turn, could spur more foreclosures, which could lead financial institutions to further increase rates they charge on mortgages.

"These things feed off of each other," Wyss said.

The same is true for businesses. Continuing expansion of the commercial real estate sector, for example, including office buildings and shopping centers, has been a major cushion from the housing downturn in recent months and has kept construction workers employed.

In February, owners could borrow against such properties at interest rates about one percentage point above the rate for Treasury bonds, based on a Morgan Stanley index for moderately risky commercial mortgage-backed securities. At the end of September, commercial property owners had to pay an additional four percentage points. By yesterday, the premium was seven percentage points.

Higher borrowing costs could make commercial builders less likely to move forward with new construction, analysts said, eliminating a crucial source of growth in jobs and in the gross domestic product.

The potential freeze in bank lending could mirror the savings and loan crisis of the early 1990s, a major cause of the 1990-91 recession.

"In any recession, you get to a tipping point where sentiment unravels and feeds on itself. Psychology takes over," said Mark Zandi, chief economist of Moody's

Staff writer David Cho contributed to this report.

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