Subprime fallout

Collapsing house

Reading Housing Bubble Blog gives an idea how widespread the subprime collapse is. They post news from all parts of the country. Lots of people are getting hosed, losing homes, in debt way past anything they can hope to repay. Meanwhile, in Sacramento, Casey Serin’s little bubble has imploded catastrophically for him. He’s lost all his houses, is about to get evicted, has no money, and his car just got broken into and burgled.

The subprime crisis is expected to worsen, says the chief executive of Freddie Mac. That’s because the most problematic ARMs, those from 2006, haven’t reset yet. This means what we’re seeing now is just the leading edge.

The US economy is slowing, with fears of stagflation. The collapsing housing market is the “main culprit.” To fight inflation (and to keep China and Japan buying t-bills) the Fed needs to raise interest rates, but as the head of PIMCO recently stated, the only way the Fed can stave off precipitous drops in the price of real estate is by lowering rates. That they will raise rates is, I think, a given.

The subprime racket was a giant Ponzi scheme that transferred billions from the poor and middle class to the already wealthy. The greedy pig investment banks and sleazy mortgage companies who foisted this on the public knew exactly what they were doing. Brokers have been going to prison, but it’s way past time for investment bankers to get indicted too.

Sue says, wait until the accounting scandals start hitting the mortgage companies. Expect another big shakeout, one that could impact investment banks too. Also, watch the allowances for bad debt, as they are probably way inadequate.

This has been a giant transfer of wealth to the ruling class from the rest of us. But they got so greedy and larcenous this time that it’s blowing up in their faces.

We need an economic system where this kind of exploitation isn’t allowed to happen, where government is beholden to the people not the wealthy.

  • DJ

    I’ve been warning about stagflation ever since Bush brought his liberal Keynesian economic policies to Washington. Government stimulus packages work on the economy in the short tun, but in the long run they create big messes. To bad Bush (apparently) didn’t take basic macroeconomics.

    As for an economic system that prevents exploitation, don’t look to government. It is by definition, in any system, run by those who seek to have things run their way– and human nature inserts greed into that equation with predictable results.

    There have been examples of non-governmental economies (i.e. communities) that avoid exploitation. Many of these (but not all) have been religious, from the early Christians (see Acts 4:32-37) to the modern Amish and Huterites– and arguably the Mormons. The existence of exploitative religious communities shows that this, too, is not a cure all. Nevertheless, the answer lies in community rather than governmental structure.

  • Jared

    I have to lay some blame on the people getting these loans. I bet, by a large margin, these loans were properly disclosed (If not, they would be unsaleable to secondary markets = bad loans that could be invalidated by a borrower at any point up to the term of the loan).
    In this case, the borrowers must sign ARM disclosures that have EXAMPLE adjustments and the corresponding payments to them. Buyer beware in all cases. They must take financial responsibility for their own actions; they sign the dotted line, literally. And likely, if they cannot afford the loan when it adjusts, they were trying their mightiest to buy more house than they could afford (especially with housing prices in California). Self inflicted.

    And contrary to common belief, by far the largest investors of “Home” Loans on the secondary markets are pension funds and the like, NOT big bad wealthy people. For that, look to large commercial property funding, (easier, more stable, less headache and compliance/disclosure issues).

    As someone who understands the lending industry very well, adding more legislation to an key economic driver which is already heavily legislated, is not a solution. I personally know the extraordinary lengths my organization goes to ‘do the right thing’.
    Those bad brokers not following the current laws will continue to skirt it; they should be held accountable for unfair or illegal practices including predatory lending.

    My 2 cents (with an Interest only payment at 14% APR with a 28% Cap Rate with payment caps and possible negative amortization)

  • Sure, some of those signing had a good idea of what they were getting into. Others didn’t, and the loan docs were clearly fraudulent – either they made it up or the broker did it for them. Now there’s way too much pain.

    While some mortgage brokers are certainly ethical, the Feds and Congress slept-walked through this until things got way out of control. And a whole lot of money went from the poor and middle class to the monied class.

    > My 2 cents (with an Interest only payment at 14% APR with a 28% Cap Rate with payment caps and possible negative amortization)

    Right… So that means I’ll owe you $452,961 by next month, but by then my 2 cents will be worth $600,000 so everything’s fine, right?

  • I think a large part of the problem is the high profit margins involved in the mortgage and real estate industries. This is always going to attract some unscrupulous operators. This has probably been reflected most strongly in the sub-prime sector of the market in th last couple of years.

    Better consumer legislation and protection is a help but ultimately I think that consumer education is the best weapon. If the consumer better understands what they may be getting involved in then they will have a far better chance of avoiding problems. I run a mortgage information site and I always try to explain the potential pitfalls as I feel that is the best way to help people avoid some of the disasters that could await them.

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