Tuesday, August 07, 2007

Subprime musings

Unless you have been hiding out in the Kola well, you have most likely heard of the subprime mortgage fallout. The cunning stunts used by rapacious bankers in order to secure the bottom line is cannot be better illustrated than in a story I read in the Times recently.

Two years ago, when the housing market was roaring along, I called a mortgage broker on the West Coast and asked for some help. I told him that I wanted to interview some recent home buyers who had taken out an adjustable-rate mortgage — one of the big drivers of the boom — and he was nice enough to pass along a short list of names. One of the buyers was a business consultant in her 40s. She told me about her charming new house and the fact that she expected it to be a good investment, even if it had cost a bit more than she wanted to spend. Then I asked about her adjustable-rate mortgage. “I don’t have an adjustable rate,” she said. Confused, I called the broker again to see what was going on. A little while later, I got a sheepish e-mail message from him explaining that her loan did, in fact, have an adjustable rate. She just hadn’t realized it.

The bad stink of foreclosures due to the subprime mortgage meltdown raised by so many people living on the fringes who might have scrapped together just enough to make their minimum payments based on a scrupulous calculation of payments that depend on tenuous connections to ones employment is only about to get worse as the following warning presages.

The peak month for the resetting of mortgages will come this October, according to Credit Suisse, when more than $50 billion in mortgages will switch to a new rate for the first time. The level will remain above $30 billion a month through September 2008. In all, the interest rates on about $1 trillion worth of mortgages, or 12 percent of the nation’s total, will reset for the first time this year or next. A couple of years ago, by comparison, only a marginal amount of mortgage debt — a few billion dollars — was resetting each month. So all the carnage in the mortgage market thus far has come even before the bulk of mortgages have reset. “The worst is not over in the subprime mortgage market,” analysts at JPMorgan recently wrote to the firm’s clients. “The reason for our pessimism is that loans originated in late 2005 and all of 2006, the period that saw peak origination volumes and sharply decreased underwriting quality, are only now starting to reset in large numbers.”

Isn’t it about time for our banks and responsible bankers to stop screwing the gullible?

The great subprime mortgage domino - in three easy graphs

Rene Magritte, 'Le science des Reves', Gouache and colored crayon on card, 12" X 16" c. 1944

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