Mortgage news, home prices ramp up pressure on Fed

NEW YORK (Reuters) - Home builders, mortgage lenders and a federal regulator maintained the flow of downbeat reports on U.S. housing on Thursday, adding to a cacophony of calls for the Federal Reserve to lower its key interest rate.

The worry is the housing slump, which first manifested in subprime loans, will slow economic growth more than first anticipated, sending the economy into recession. A report of sliding home price gains signaled a tougher road for companies that are now struggling to stay open or just wash their hands of the business.

Home price appreciation last quarter slowed to a 3.2 percent gain from a year earlier, the smallest gain since 1997, according to the Office of Federal Housing Enterprise Oversight. Developments since June, including a rise in number of homes for sale and the collapse of some markets that finance home buying, darkened the outlook for the industry.

"The problem in the last few weeks is we had a major hiccup in credit markets" that restricted money for many kinds of loans and consumers, said Scott Anderson, a Minneapolis-based senior economist at Wells Fargo & Co, the No. 2 U.S. mortgage lender. "It's really too early to tell what the extent of the damage is."

Executives from jumbo mortgage lender Thornburg Mortgage Inc (NYSE: - ) and home builder Hovnanian Enterprises Inc (NYSE: - ) appealed for more help from the Fed, which controls the rate that banks lend to each other on an overnight basis. Financial markets already expect a quarter-percentage point cut in the federal funds rate target at the Fed's policy meeting on September 18.

Ara Hovnanian, chief executive of Red Bank, New Jersey-based Hovnanian, said in a CNBC interview that the risk of recession is "heightened" by credit market malfunction, and a group of home builders plan to meet with Fed Chairman Ben Bernanke next week.

Thornburg Mortgage Chief Operating Officer Larry Goldstone later criticized the Fed in the same forum, blaming officials for a lack of leadership and asserting that they do not "understand what's happening out here."

Santa Fe, New Mexico-based Thornburg on Thursday said it solved short-term funding difficulties by raising $500 million in convertible preferred stock. The sale allowed the company to resume the loan-making it stopped when the credit crisis hit even their specialty of high-quality jumbo mortgages.

Earlier in the week, Thornburg said it sold more than 35 percent of its assets and reduced its borrowings to cut risk.

Shares of Hovnanian rose 3.4 percent to $11.34 in late afternoon trading. Thornburg climbed 7 percent to $11.95.

The economy is still solid, with low unemployment, Wells Fargo's Anderson said. The government on Thursday also revised its estimate of second-quarter gross domestic product growth to an annual rate of 4 percent from 3.4 percent.

GDP may slow to about 2.4 percent in the second half of 2007, and then edge higher in 2008, he said. Expectations of modest but steady growth will increase the Fed's reluctance to lower the fed funds target by anything more than 0.25 point this year, he said.

Hovnanian, whose industry has been especially hard hit in the housing slowdown, predicted the economy will continue cool without the Fed's hand. More than a third of home builders said customers canceled contracts for new homes in the past month due to tighter lending standards, the National Association of Home Builders said on Tuesday.

Deteriorating credit performance has now reached into the world of government-chartered company Freddie Mac (NYSE: - ), which raises money for mostly prime mortgages. The McLean, Virginia-based company said its second-quarter profit fell 45 percent to $764 million as costs related to failed loans current and anticipated more than quadrupled.

Freddie Mac Chief Executive Richard Syron joined others in expressing surprise over the magnitude of housing woes. He also urged the company's federal regulator to loosen restrictions on its investment portfolio business, which purchases billions of dollars in loans and securities each month.

"I was bearish ... but I was not bearish enough," he said of housing on a conference call with analysts. Freddie Mac shares declined 4.7 percent to $60.31.

Even companies trying to wash their hands of the mortgage business are hamstrung by the environment. H&R Block Inc (NYSE: - ), the largest tax-preparer, said it may shutter mortgage lending operations at its Option One unit as it renegotiates its contract to sell the group to private equity firm Cerberus Capital Management LP.

H&R Block also said its quarterly loss more than doubled to $302.6 million, dragged down by the mortgage unit. Its stock rose about 0.9 percent to $19.71.

"The mortgage origination market is in the midst of the most severe dislocation that it has seen in years, maybe the most severe since the 1930s," Mark Ernst, chief executive of the Kansas City, Missouri-based company said on a call.

(Additional reporting by Jonathan Stempel and Tim McLaughlin in New York, Scott Malone in Boston and Patrick Rucker in Washington)