2007-06-12nytimes.com

"ANYONE who believes that the worst is over in the subprime mortgage fiasco need merely wait awhile. A tsunami of interest rate increases on these loans is headed your way."

This is a relatively good piece from the NYTimes (from over the weekend). It discusses much of why we find the notion of the mortgage lending implosion being over to be, frankly, laughable. The early defaults we've seen so far on subprime and Alt-A loans have happened in an almost optimal environment (by mainstream accounts, at least). As this article describes, that environment is set to get much worse, as more marginal loans start to reset:

Especially ingenious — for lenders, at least — were so-called exploding A.R.M.'s that lured borrowers with unusually low teaser rates that then reset skyward two or three years later (typically pegged to the London Interbank Offered Rate, plus six percentage points).

During the next five years, some $1 trillion in adjustable-rate mortgages will reset. But in the here and now — from just June to October this year — more than $100 billion of that amount is scheduled to reset, and all of it is in loans that are in the riskier subprime category. Given the recent interest rate spike, many of those loans that once carried low teaser rates are on track to reset to at least 11 percent — or more than four percentage points higher than the current rate on a conventional, 30-year home loan.

The article continues with two significant points:

What's more, fully 35 percent of the most recently issued loan pools in the index have delinquency rates that exceed the target levels specified when they were sold to investors. And for loans made in the first half of 2006, three-quarters are exceeding their delinquency targets.

Add to this grim picture the fact that many of the loans taken out most recently are held by people who probably have little or no equity in their homes. As prices soften further, these borrowers will find themselves "upside down" — owing more on their mortgage than their houses are worth.

None of this bodes well for home prices, which are already flat or falling. Then again, this is what a mania always looks like when it unravels.

That is, (1) we're facing a continued housing finance collapse, as the assets backing marginal loans (subprime and beyond) fail to perform as promised as investment vehicles (and the bread-and-butter of the banking sector), and (2) the consumer side of the housing market has more pain in store for it as restricted financing limits home-buying.

The article goes on to talk about regulation, with this amusing but apt point:

"If we had 1.2 million people whose toasters had exploded this year, we would not be saying they should have checked the wiring more closely before they bought those things," Ms. Warren [Harvard Law School professor and bankruptcy expert,]said.

...

Ms. Warren's idea for a financial product consumer safety unit will probably be laughed off the stage by the anti-regulation crowd. Get ready for gripes and groans from the usual suspects saying that increased regulation would poison the American economy and cripple our competitiveness.

We agree that a major burden is on the industry to come clean with consumers. But to argue that retail regulation is the blanket answer to the housing bubble fiasco is to display ignorant, dewy-eyed naivety of the most acute degree. In specific, we would point the finger at the Master Regulators over at the Fed for engineering this mess. Interest rates of 1%? Encouraging everyone to take on these "exploding" ARMs at such interest rates? Eliminating the 30 year bond in 2001 (in effect forcing foreign central banks to buy the 10-year notes that undergird mortgages)? Madness, if not malice. Clearly, the intent was to inflate a housing bubble. A blind eye was turned to recklesness and imprudence.

More fundamentally, banking cartelization under the Fed is the root problem, which no amount of additional retail or business regulation will fix (they are, in fact, an intentional distraction). If this is to be the limit of the "solution", the financial bubbles will just shift around, popping up wherever regulation has not yet caught up, like a great game of whack-a-mole. Banks will care little about restricting loan-making as long as they relinquish no assets to do so (instead, creating money out of thin air) and get to skim hefty fees in the process. All the better when they can flip these financial assets to hapless suckers, like pension funds, risklove hedge funds (gambling with other people's money), and foreigners.

We've seen this all before: in the 1980s oil finance bubble; in the S&L debacle; in Long Term Capital Management; in the NASDAQ bubble. It's always the same story, with an investment bubble inflated full of bad loans and/or leveraged speculation with other people's money. The general public is always forced to pay the ultimate cost for the "mistakes" of their ersatz "regulators" -- and the inquities of their golf-buddies.



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