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Mortgage woes wreaked havoc in the stock market Tuesday, resulting in the second-worst day for Wall Street in 2007. The sharp falls in stocks across the market was fueled by a report released by the Mortgage Bankers Association yesterday afternoon, revealing a climb in the number of homeowners defaulting on their mortgages.

The news came as the market was already reeling from drastic cutbacks and financial distress among several publicly traded and investor-backed mortgage companies that specialize in loans to consumers with poor credit. One such company, New Century Financial Corp., announced Tuesday that the SEC was investigating its business practices and that the lender had been served with subpoenas from the central California U.S. Attorney’s Office. New Century, based in Irvine, has been one of the most dramatic examples of the nosedive this sector, the so-called subprime mortgage market, has taken in recent weeks.

Stock prices for San Diego-based Accredited Home Lenders collapsed Tuesday, falling 65 percent to $3.97 a share. The price dive came after the lender, which specializes in making loans to consumers with poor credit, announced it was facing a financial crisis and would pursue “strategic options.”

From a New York Times story on Tuesday’s mortgage-related stock trouble:

“It’s a measurable weakening in credit quality across the board,” said Mark Zandi, chief economist at Moody’s Economy.com.

The rise in delinquencies will further strain the housing market, he said, because more houses will be put up for sale as foreclosures end in auctions, driving down home prices, which in turn will make it harder for struggling homeowners to refinance or sell their properties.

“This has a long way to play out,” he said, “because it now has this self-reinforcing quality that is seemingly kicking in and will extend the housing correction.”

KELLY BENNETT

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