Subprime mortgages

Michael Mandel serves up a dose of common sense:

adjustable-rate mortgages, which are the heart of the problem, make up
just 7% to 8% of the total home mortgage market.  Still, in absolute
terms the size of the defaults could be enormous.  Some estimates
suggest that banks and other lenders could take a hit of $300 billion
or more.

But remember, the tech bust devoured about $9 trillion
in corporate equity; next to that, the subprime problem looks like an
insect bite–unless it spreads to the rest of the mortgage market.  But
at least so far that doesn’t appear to be happening: Mortgage rates for
good borrowers have actually been going down.  In early February, for
example, the average rate for 15-year fixed rate mortgages was 6.06%,
according to Freddie Mac.  As of Mar. 8, that was down to 5.86%.

For an alternative perspective, here is Nouriel Roubini’s Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry.

In other words, I am to blame.  If not me, then Alex.  Blame Alex.


Roubini's essay is embarrassing.

What concerns me is the impact of losing the marginal 7-8% of home demand will have on overal prices (they seemed to be the highest bidders for homes).

Has Roubini jumped the shark?

Tyler and Alex are probably also responsible for the "Bretton Woods II" China currency peg and its subsequent collapse and the global economic disaster that followed it, which according to Roubini happened three years ago, or maybe two, or maybe last year, or maybe this year, but if not, then next year for sure.

Yeah, 8% of home owners defaulting on mortages will have a marginal impact on the housing market. It isn't like there's already excess supply in the market or mortgage payment afforability is at historical lows. The mortgage market is perfectly compartmentalized to contain that slice of the pie charts you're all looking at.

These are the same tools who were saying that the market was perfectly healthy in 2005 and 2006 and the risks were so small that fundamentals supported market. In six months I wonder what the naysayers taking pot shots at pessimists will be saying.

In six months I wonder what the naysayers taking pot shots at pessimists will be saying.

"Hold still, darn you!" [Bang! ptwing...] "I told you, Jim, you've gotta lead 'em."

Mr. Mandel notes that the subprime market is estimated to be 7-8% of the total mortgage marker. I suspect that Mark is a bit too pessimistic in thinking that 100% of that market will default.

I read some of the permabears just to see if they have anything interesting to say, and I am always amazed at their ability to find the dark lining in the silver cloud. I think the bears are driven in part by political partisanship, but also by the feeling that they really know what danger we are all in, and the rest of us are just fools who will be dashed on the rocks by this year's coming crash.

Thanks to MR's recommendation, I am a regular reader of, which is a great antidote to the doomsters.

The correct answer is that this is unchartered territory.

The key to loose lending is that it works as long as home values increase. Without the equity to tap, the loss severity potential is very high.

Everyone is focusing on subprime, but delinquencies accross all products (alt-a, other home equity and prime) have dramatically increased.

The Fed cannot lower rates to save potential defaulting borrowers because he has said that their goal is to fight inflation. By doing nothing, more floating rate borrowers, not just subprime, will be adjusting at higher rates that some cannot afford. This will increase defaults. They can only lower rates if and when this becomes a big problem.

Saying that the 15 year rate is lower is pratically irrelevant for current borrowers. Arms reset with LIBOR, a floating short rate, not the 15 year, a fixed long rate. Could they refinance into a 15 year? Yes, but more than likely their payment would be higher and they would take a hit on their house because the value has declined. Most people would not make that trade.

Let's just forget the lenders for a moment and discuss all of the other services related to housing. Using the 7-8% of all housing (the real number is actual about 15%), will builders, realtors, title companies, furniture stores, hardware stores, or any type of remodelers or home maintenance shops be negatively affected by this segement loss? Sure, now add all of the non subprime home owners as well. Yes, there will be some offsets in foreclosure related firms, but not much of an offset.

Lender have already started to become a little more conservative in their lending practices. Combine this with any idiotic plan Congress will come up with now to save future borrowers and you have a problem for current subprime borrowers who are delinquent. If they try to refinance to avoid foreclosure, they will not qualify for any loan program and will loose their house.

That is just the economic side, the fixed income side is a whole other ball of wax....

Wow reading Nouriel I picked up these tidbits. Angry much Nouriel?

Also I like how Roubini goes into how he/she can look into the hearts of those that borrowed for a condo to see if they were a flipper or were duped to divine if they should get a government subsidy or not. It is good to be king.

I'm amazed at the number of "toxic wastes" ... beats out "voodoo priests and their acolytes"

a cabal of supply side voodoo ideologues -
other assorted voodoo religion priests
proof-less dogma
free market supply side voodoo fundamentalism zealots
toxic waste
voodoo religion cabal
voodoo economics religion priests
toxic waste
free market zealot and fanatics and voodoo economics ideologues
main religious dogma of this cabal
ideological zealotry
gang of voodoo economic hacks
bunch of voodoo priests of laissez-faire capitalism
the disease of a reckless patient who lived in a bubble
priests of a voodoo religion
this cancer to grow and fester.
free markets voodoo religion
voodoo priests and their acolytes
voodoo free market system of financial incentives for lenders
toxic waste
toxic waste
oligopolistic credit rating agencies
toxic waste
toxic waste
toxic waste
excesses and monstrosities
monstrous bubble to be created, to be allowed to fester
free market fundamentalist zealots
voodoo economics hacks
zealots who want low taxation of capital
free market fundamentalist zealots who love no regulation and little taxation of capital for this sorry state.
free market zealots
voodoo religion hacks and zealots
greedy cowboys
toxic waste
toxic garbage
private sector crazed mania
toxic waste
Free market fundamentalist zealotry
free market fundamentalism zealots
dogmas and free market fundamentalism
ideological zealots
Ideological supply side voodoo zealots
unregulated free markets fundamentalism

Roubini does not hate seeing himself in print. :^)

Japan did not have an influx of immigrants to stabilize its real estate bust.

Just in my block I know of several houses being lived in (rented I believe, but who knows?) by recent immigrants.

My HOA wants to try to kick them out because they are "crowded houses"...

As long as people want to move to the US, and are allowed to (in reality, versus in law), property values will rise.

We all believe in markets right? That markets will swing over and below where they should rationally be from time to time (Keynes "animal spirits) and that investors have to take it on the chin when they chase deals that are too good to be true. Yes, there will be some impact on the overall economy from the sub-prime meltdown. It will not kill the economy and the pain to the average person will be minimal and short term. Some pain is the price we pay for relatively free markets. Or we can over regulate and have everybody share in a greater pain from a much less rich economy.

Over a year ago, Roubini claimed there was a 70% chance the economy would be in recession by the first quarter of 2007. As a "supply side voodoo zealot" with a much better forecasting record than he has, I sometimes try to help Mr. Roubini see himself in print. Here is an example:

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