Markets stomped by mortgage woes

NEW YORK (CNNMoney.com) -- Stocks sold off early Friday, continuing steep losses for the week, as Wachovia and the government-backed Fannie Mae became the latest victims hit by the fallout in the mortgage sector.

The 30-share Dow Jones industrial average (Charts) and the broader S&P 500 index (Charts) each fell about 1.2 percent, while the tech-fueled Nasdaq (Charts) slid over 2 percent.

Wachovia (Charts, Fortune 500), the nation's fourth-largest bank, said the complex debt instruments it held in its portfolio declined in value by an estimated $1.1 billion before taxes in October, leading to a $600 million loan-loss charge for the current quarter. The bank had reported $1.3 billion in pre-tax losses in the third quarter tied to pools of debt backed by home loans.

Fannie Mae (Charts), the largest buyer and backer of home loans in the country, said Friday its profits fell by half over the last nine months.

The government-sponsored company said it earned $1.17 a share from January through September, down from $3.5 billion, or $3.16 a share, in the same period last year. Its shares fell more than 7 percent.

Stocks have sold off as traders worried about the wider economic impact of losses at financial companies and the growing ranks of consumers saddled with expensive mortgages and high energy bills.

"The fear is spreading," said Joe Battipaglia, Chief Investment Officer at Ryan Beck & Co. "Investors think profits may have hit thier peak, not just in fiancials but across other sectors of the economy."

The losses from Wachovia and Fannie come after Citigroup (Charts, Fortune 500) said last week it expects to write down a further $8 billion to $11 billion in the fourth quarter due to credit- and mortgage-related problems. Citigroup and warnings of more write downs from other banks caused the Dow to lose 362 points last week.

On Wednesday, the Dow posted one of its biggest single-day declines, falling 361 points on further credit market fears.

In recent months, banks and other financial institutions have taken big losses on mortgage-backed securities, which package individual home loans and sell them as an investments.

Those investments soured when people started defaulting on loans because of the decline in the real estate market, which ended their hopes of refinancing on the back of rising home values.

Adding to investor woes was a weak growth forecast from the 27-nation European Union, which said growth is expected to slow to 2.4 percent next year and in 2009, down from 2.9 percent this year. The EU attributed weaker growth to problems stemming from the subprime mess in the United States and the rise in oil prices.

The University of Michigan report on consumer sentiment came in well below estimates, but did little to move markets.

A bit of positive news: The U.S. trade deficit fell to the lowest level in 28 months as a falling dollar helped boost exports.

Among stocks in the news Friday, Merck (Charts, Fortune 500) announced it will pay $4.85 billion to resolve most of the the 27,000 claims involving its blockbuster pain medication Vioxx. Merck shares climbed 5 percent.

Disney (Charts, Fortune 500) reported earnings that beat expectations on sales that were roughly in line with analysts' estimates.

Clearwire (Charts) and Sprint Nextel (Charts, Fortune 500) said they ended an earlier agreement to build a high-speed wireless network.

Meanwhile, oil prices resumed their assault on $100 a barrel. U.S. light crude for December delivery rose $1.19 to 96.65 a barrel on the New York Mercantile Exchange.

The dollar fell to another record low versus the euro. Treasury prices rose, with the yield on the benchmark 10-year note falling to 4.25 percent. Bond prices and yields move in opposite directions.

Major markets in Asia and Europe finished lower on mounting credit fears.

Market breadth was negative. Losers topped winners by 5 to 1 on the New York Stock Exchange as 576 million shares traded hands. Decliners beat advancers by 3 to 1 on volume of 1.04 billion shares.

COMEX gold lost $2.50 to $835 an ounce.