The number of American homes entering foreclosure rose to the highest level on record in the fourth quarter of 2007 according to a report on Thursday. Another report revealed that US homeowners' share of the equity in their homes fell to a post-World War II low. Also on Thursday, the credit crisis intensified when two big US financial firms, defaulted on loan obligations.

The Mortgage Bankers Association reported that the delinquency rate - the proportion of borrowers more than 30 days overdue on payments - for mortgage loans on one-to-four-unit residential properties stood at 5.82% of all loans outstanding in the fourth quarter of 2007 on a seasonally adjusted basis, according to MBA's National Delinquency Survey.

The MBA said that the total delinquency rate is the highest in the MBA survey since 1985.  The rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever.

Americans' percentage of equity in their homes, in aggregate, has dropped below 50% for the first time on record since 1945, the Federal Reserve said Thursday.

Homeowners' percentage of equity fell to a revised lower 49.6% in the second quarter of 2007, the Fed reported in its quarterly US Flow of Funds Accounts, and dropped further to 47.9% in the fourth quarter - the third straight quarter it was under 50%. That marks the first time homeowners' debt on their houses exceeds their equity since the Fed began tracking the data in 1945, when the ratio was more than 80%.

The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.

The credit markets came under renewed strain on Thursday as investors showed heightened risk aversion and even shunned the debt of Federal sponsored housing finance guarantee agencies, Fannie Mae and Freddie Mac.

In New York, Timothy Geithner, the President of the Federal Reserve Bank of New York, said that some banks had moved from being too willing to take on risks to being reluctant to take any chance of losing money, a move that was making the crisis worse.

"Uncertainty about the market value of securities and about counterparty credit risk has increased, and many hedges have not performed as intended. The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning. This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions."Geithner said in a speech to the Council of Foreign Relations. "In this environment, banks have faced several different types of liquidity and funding challenges. They have been called on to fund a range of different contingent liquidity and credit commitments, as is typically the case in crises. The substantial impairment of securitization and syndication markets has been an additional challenge because it has reduced banks’ access to liquidity and their capacity to move assets off balance sheets. As the market value of many securities has declined, and investors have reduced their willingness to finance more risky assets, liquidity conditions have eroded further. In response, even the strongest institutions have become much more cautious, building up large cushions of liquidity, bringing down leverage and reducing financing for their leveraged counterparties."

Timothy Geithner, President of the Federal Reserve Bank of New York

The news that two big name financial firms could not meet their debt demands of lenders, spooked investors on Thursday.

Both Carlyle Capital, a unit of the Carlyle Group, a major private equity fund, and Thornburg Mortgage, the second-largest independent mortgage lender in the United States after Countrywide Financial, said they had been unable to meet the demands and had defaulted on some obligations..

Carlyle Capital has $21.7 billion investments in assets with virtually all of it pledged as collateral against loans. It's borrowings amount to about $31 for every dollar of equity and it has a $150 million line of credit from its parent but this week was faced with demands for more collateral to back up the loans.

Carlyle Capital said on March 5th, that up until then, "the company had met all of the margin requirements imposed by its repo counterparties. However, on March 5, the Company received additional margin calls from seven of its 13 repo counterparties totaling more than $37 million. The Company has met margin calls from three of these financing counterparties that have indicated a willingness to work with the Company during these tumultuous times, but did not meet the margin requirements of the four other repo financing counterparties. From this group of four counterparties, one notice of default has been received by the Company and management expects to receive at least one additional default notice."

Net income for the fourth quarter of 2007 was $17.6 million, compared to a net loss of $34.2 million in the third quarter of 2007. As of February 27, 2008, the Company’s "Liquidity Cushion" had increased from $67.2 million to $130 million.

As of February 27, 2008, the company’s $21.7 billion investment portfolio comprised exclusively of AAA-rated floating rate capped residential mortgage backed securities issued by Fannie Mae and Freddie Mac, which it said in its earnings report: "are considered to have the implied guarantee of the US government and are expected to pay at par at maturity."

In testimony to the US Congress, an official of a Federal agency said that Fannie and Freddie, “with more than $6 trillion in outstanding obligations,” could pose “significant risks to taxpayers” if they ran into difficulty.

The index of yields on Fannie Mae guaranteed loans rose to 5.96% on Thursday compared with the yield on 10-year Treasury bonds of  3.58%.

The difference in the two yields, of 2.38%, is reported to be the largest since 1986 and more than twice the difference of a year ago, before credit crisis.

The Wall Street Journal reports today that financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back.

Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets.

This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and lenders feel compelled to make further demands, or "margin calls," which cause even more selling.