MONEY CULTURE
Daniel Gross
Subprimes: From Bad to Worse
The mortgage mess isn't causing our worsening economic condition; it's a symptom of a far more serious problem.
The stock market rallied today after President Bush announced a deal under which mortgage lenders would cut subprime borrowers some slack and freeze rates. The rally represents the latest effort by the financial-industrial complex to draw a bottom line under the spreading credit woes. The market seems to have concluded that the negative effects of the subprime mess may finally be contained.
I hate to be the bearer of bad news, but the subprime flood—which has been declared contained over and over again—isn't contained yet. My NEWSWEEK colleague Daniel McGinn ably explains why the rate freeze is far from a panacea for all subprime borrowers. And a flood of new data indicates that the subprime woes may be a symptom—rather than a cause—of a broader economic malady. That awful smell in Midtown Manhattan isn't from the horse-drawn carriages carrying tourists around. It's the distinctive odor of debt going bad.
We've just ended a bubble in housing, in housing-related credit, and in all other types of credit. Low interest rates, competition for market share, the continual pooh-poohing of inflation, and the widespread use of securitization spurred banks and mortgage companies to lend with abandon. Any risk associated with lending could be ironed out by slicing and dicing debt and selling it to investors, who could in turn hedge their exposure to the debt through derivatives. Any remaining risk would be wiped out by growth, perpetually rising asset prices, and a willingness of other lenders to refinance existing debt on favorable terms. And so credit was available on easy terms to people in all walks of life: home buyers and real estate developers, car buyers and college students, consumers and private equity firms.
Today, however, the assumptions holding up the latticework of credit are coming apart, one by one. Even as the economy continues to expand, more and more borrowers are having difficulty remaining current on their debt. Which isn't surprising, given that median household income hasn't budged since 1999 (see Figure 1 on Page 4 of this Census report). What's more, in a natural reaction to reckless lending, mortgage companies and banks are now in money-hoarding mode and thus unable or unwilling to help Americans refinance existing debt.
The Mortgage Bankers Association today came out with its "national delinquency survey," which has nothing to do with high-school kids sniffing glue. "The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 5.59 percent of all loans outstanding in the third quarter of 2007," up from 4.61 percent a year ago. This figure, which doesn't include loans in the process of foreclosure, is "the highest in the MBA survey since 1986." While the pain was concentrated in subprime (16.31 percent of subprime loans were delinquent in the third quarter), the seasonally adjusted delinquency rate for prime loans rose to 3.12 percent from 2.73 percent in the second quarter.
As the volume and price of new home sales continues to fall, home builders are suffering as well. The Wall Street Journal reported yesterday that delinquencies on loans extended to condominium developers have risen sharply in the past year. In the third quarter, 5.9 percent of such loans were delinquent, up from 4.1 percent in the second quarter, according to Foresight Analytics. The delinquency rate for builders putting up single-family homes rose from 3 percent in the second quarter to 4.3 percent in the third quarter.
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Member Comments
Posted By: Johndavidprince @ 03/17/2008 9:35:49 AM
Comment: While we are arguing over political issues that are not true issues the dollar has sunk to levels not seen in years. The level of debt is astounding. Corporate oversight is at an all time low not seen since the 1920???s unregulated stock market or the days of the robber barons and monopolies that crippled the economy stifling competition. We have a housing market that is more like a funeral than a market with upside down mortgages, foreclosures, and evaporating value. Then add in the geopolitical issues that destabilize the energy supply, like the Middle East and South America. Plus there is the Individual debt, abusive business practices, unsustainable business strategies, corporate scandals, and general greed. Then top it all off with trade imbalances, national debt, war spending, poor ignorant management of the institutions of power in the nation, and we are still talking about issues in politics that have no real barring on how to fix a broken system. We are shocked by republican or democratic sex scandals. We are fighting over, race, gender, or religion while the real issues remain on the sidelines. We are failing the future generations if we continue the madness. We will fail the world if we do not leave behind our puritanical culture war and unify to correct the real problems facing the nation. More morality will not fix the economy. More religion will not fix the economy. The free market will not fix the issue of oversight, product safety, or ethics in business on their own. We have had 25 years of Milton Freidman economics and Leo Strauss or Irving Kristol political ideological results. We have a divided nation that is bankrupt both morally and financially, led by those proclaiming the influence of religion fused with government, a free market with an absence of oversight, and a government that under conservative republican control wishes noting but the elimination of government except for the military. We are seeing the fruit of their tree rooted in outdated, ignorant misconceptions of ideology, theology, ecology, and sociology. The failure of their political agenda has been the disenfranchisement and general distrust of government and the other higher institutions of the nation. They have betrayed the public trust not by sleeping with a call girl, rather they have violated it with absolution water-boarded by blind ignorance and a romanticism for an ideological concept that flawed with a focus on the ???ME??? instead of the ???WE.???
Posted By: Johndavidprince @ 03/17/2008 9:35:16 AM
Comment: Personal responsibility is often mentioned especially by the right wing of the Republican Party. The all to familiar phrases used are ???pull yourself up by the bootstraps??? or ???man up??? and various other lexicons. Why then should corporations ever be bailed out for their poor judgment or mismanagement of business? Why should government ever assist the ???free market??? with tax breaks, tax shelters, subsidies, and vast grant programs? Should the ???free market??? be allowed the freedom to suffer from their own mistakes? Every time we the tax payer jump in and bail the market out we are allowing business to skate from personal responsibility, the very antithesis of conservative ???free market??? dogma. The goose must not care about the gander, only the goose. We have been bailing out scandals, fraud and massive debt for a long time. Lately we have been bailing out debt with debt and we wonder why the market has collapsed like we have never seen since the Great Depression. The last straw that will break the back of the flailing market is unemployment and further erosion of the dollar. Can the neo-conservatives follow their own advice? I doubt it. The problem goes deeper than just economic hypocrisy. There is a systemic cancer within the modern capitalistic establishment. Corporations have since 1890 or so have been granted the equal application of the law under the 14th Amendment. Many have complained before me, so this should be nothing new. I feel that is the hart of the issue is a free market stampeding toward the cliff like buffalo hunted by the injustice of the abuse of the legal system of the US. The favoritism or unequal weight of law is leaning drastically toward market benefit. The legal argument of corporations is that they are equal to humans. Really? There is more law on the side of the protection of the Market and Corporations than there is for the individual living breathing citizen. It does not require legal council to come to that conclusion. The end result in my opinion is that we now have a separate and unequal class of citizen in the US by weight of law alone. If we also consider the true definition of a citizen as a human or person the corporate legal grounds for their argument fall on their face due to the merits of further in-depth thought.
Posted By: michelsonB @ 02/25/2008 12:42:55 AM
Comment: Los Angeles 02/2008 DATELINE --- It's amazing how many homeowners will not fight the foreclsoure process. According to borrowerhotline .com, more than 70% of american homeowners accept their fate and eat the pain of a forclosure. This information is offered by Maher Soliman, the web site publisher and managing director for NLS.
According to the website, in June this year the secretary of Housing and Economic Development of the Patrick administration Dan O???Connell took the initiative along with government officials and top mortgage firms??? executives from Massachusetts to develop means through which foreclosure can be avoided and the foreclosure victims can be aided.
Delinquent Sub-prime loans were accentuated to be the main reason responsible for the soaring rise of foreclosure victims. Borrowers with bad credit history were allowed with high risk loans as they were tempted seeing the initial rates were low. The ravaging effect started when the rates of interest shot up unexpectedly high. Enactment of laws checking the foreclosure rates were suggested by Governor Deval L. Patrick.
In April in meeting called by the Patrick administration it was suggested that the State should financially help to refinance loans to reduce foreclosure rates.
Reforms aiming to help the debtors to catch up were planned and corresponding schemes were passed in 2006. The plan targeted to provide defaulting hose owners to catch up by extending the grace time from 60 to 125 days. Unfortunately the plan failed to go very far.
NLS and borrowerhotline are consumer homeowner advocates pushing to stop foreclosure due to predatory lending practices. Call Direct at telephone 310-435-2628
www.borrowerhotline.com ....and spread the word to friends and workers. This has to be stopped! Find out what you are entilted to receive!