The stock market, which had been up sharply early yesterday, reversed course abruptly amid renewed concerns about loans and securities derived from home mortgages. The Dow Jones Industrial Average, which had been up more than 140 points, closed down 146.32 points, or 1.1% from a day earlier, at 13211.99 — a swing of nearly 300 points, or more than 2%. U.S. Treasury bonds rallied as investors sought the stability of government-backed bonds.
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The nervousness was fed by rumors of troubles at hedge funds that are invested heavily in mortgage securities. Bear Stearns, its reputation already dented after two of its hedge funds that bet heavily on securities connected to risky home loans blew up in June, has prevented investors from taking their money from another fund that put about $850 million into mortgage investments.

In recent weeks, as the housing market continued to weaken and trading firms began to price many mortgage investments at discounted levels, Bear executives realized their Asset-Backed Securities Fund was facing a rough July, said people familiar with their thinking.

Unlike Bear’s other two funds, these people said, the asset-backed fund borrowed no capital and had practically no exposure to subprime mortgages, as home loans extended to people with weak credit are known. But a combination of markdowns on a broad range of mortgages and a series of refund requests could force the fund out of business eventually, according to one person familiar with the situation.

A spokesman for the firm disputes that, however. “There are no plans to shut down the fund,” said Russell Sherman, a Bear spokesman. “We believe the fund portfolio is well positioned to wait out the market uncertainty. And we believe by suspending redemptions, we can ensure the best long-term results for our investors. We don’t believe it’s prudent or in the interest of our investors to sell assets in this current market environment.”

Traders said yesterday’s stock-market selloff was ignited by a warning from American Home Mortgage that pressure to repay its creditors may cause it to liquidate its assets. Its shares subsequently plunged 89% to $1.13. Several Wall Street firms have loaned money to American Home, the 10th-largest U.S. home-mortgage lender in this year’s first half, according to Inside Mortgage Finance, a trade publication.

The Melville, N.Y., company said turbulent mortgage-market conditions forced it to mark down the value of its portfolio of home loans and loan-backed bonds. Some financial backers want their money back, and the company said it needs to hold on to cash in case the credit environment worsens.

The insurance sector was also singed as two large mortgage insurers saw their share prices drop sharply after announcing that their stakes in a firm that invests in subprime mortgages had been “materially impaired.” What spooked investors in MGIC Investment Corp. and Radian Group Inc. was the firms’ holdings in Credit-Based Asset Servicing and Securitization LLC. As of June 30, each insurer had more than $465 million of equity in C-BASS, which invests in mortgages and related securities.
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“The market [for mortgage securities] is pretty much terrified at this point,” said David Castillo, senior managing director at Further Lane Securities, a dealer based in New York. “It’s starting to sink in that this is a broad-based issue that’s not going to go away any time soon.”