Wall Street stocks retreated on Thursday as warnings over mortgage loans to borrowers with poor credit hit shares in financial groups and homebuilders.

The concerns were sparked by HSBC, the world’s third-biggest bank, reporting that its bad debts were higher than analysts’ estimates because of its US mortgage lending.

The rise in defaults surprised investors and sparked selling of sub-prime mortgage lenders and homebuilders. The S&P Homebuilders index closed down 2.7 per cent.

HSBC’s announcement coincided with a warning from New Century Financial, another big US sub-prime mortgage lender, over weaker results because of rising defaults. Its shares plunged by 36.21 per cent to $19.24.

Financial services groups also suffered, with shares in Wells Fargo down by 0.9 per cent to $35.56 and Lehman Brothers down 1.3 per cent to $84.42. Sub-prime lender Accredited Home Lenders fell by 6 per cent to $27.25.

Toll Brothers, the homebuilder, undermined hopes of a quick housing market recovery by saying its first-quarter sales had fallen by almost a fifth to $1.1bn. Its shares were down 3 per cent to 33.39.

The S&P 500 closed down 0.1 per cent at 1,448.31, while the Dow Jones Industrial Average was off 0.2 per cent at 12,637.63. The tech-led Nasdaq Composite was 0.1 per cent lower at 2,488.67.

Some investors were unfazed by the falls. “The market fundamentals have not changed,” said Alfred Goldman, chief market strategist at AG Edwards. “This is a case of profit taking.”

Early sentiment was also depressed by a disappointing sales figures from Costco, the retail group. Underlying sales rose by 2 per cent in January, well below analysts’ estimates. However, Costco’s shares trimmed an early decline to stand 0.9 per cent lower at $56.62.

Gap reported better sales, sending the retailer’s shares up 2.6 per cent to $19.75, but wider fears over consumer spending weighed on the sector as a whole.

The $2 rise in oil prices to $59.71 did boost energy groups, sending the American Stock Exchange Oil Index up 1.1 per cent.

Shares in Walt Disney retreated from early gains to trade 0.5 per cent softer at $35.29 on profit taking after the group said that its quarterly net income had more than doubled to $1.7bn.

Warner Music disappointed investors after it said first-quarter profits had slumped 74 per cent to $18m. Worries over the pace of growth of its digital music business sent its shares down 5.8 per cent to $20.27.

Shares in EMC jumped 6.62 per cent to $14.50 after the storage systems group said it plans to sell a 10 per cent stake in its VMware subsidiary through an initial public offering.

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