Inman Blog challenge: Is subprime market in for dire destruction?
Friday, January 19, 2007
Inman News
Editor's
note: The following excerpt from the Inman News Blog examines
aspects of the subprime mortgage market, what fueled its growth, and what could
be in store for this segment, which has grown at a rapid pace over the last few
years. Inman News welcomes your comments on what is happening in the subprime
market. Click
here to join a discussion.
The Subprime
Tsunami
Here is the
scenario: China is creating wealth at record levels. Its central bank has
invested more than $1 trillion in U.S. Treasuries and mortgaged-back
securities. In fact, it is the largest investor in MBSs. The fastest-growing
piece of MBSs has been subprime loans.
Years ago,
Wall Street figured out it could make a mint off mortgages and began packaging
them as fast as the Chinese were building high-rises in Shanghai.
But the
supply was constrained, so the Street urged originators to originate more home
loans, as they had plenty of investors, including deep pockets from China (and Japan
as well).
Then along
came the minority/immigrant home-buying market as an opportunity. Promoting
home ownership to this crowd became the rallying cry of President Clinton,
President Bush, Congress, the Realtors, the home builders, mortgage bankers and
the average bus boy who until now could not afford to buy a house. It was an
apple-pie bandwagon that no one could resist.
But how do
you dig deep into this market unless you permit nothing-down loans, low-cost
ARMs and loose underwriting? You can't.
Hello
subprime mortgage market. Bingo -- it became the formula for the biggest
property-ownership push since the Homestead Act. The politicians fed off the
phenomenon and the industry lapped up transactions. Sitting behind the curtain
was Wall Street, of course, which made a boat load of money.
Add
careless underwriting on refinancings and credit lines and the money that came
from China to help make more loans goes right back to the Chinese shores as
consumers use their houses to buy depreciating assets like cars, clothes, toys
and all sorts of stuff.
Now for the
hangover: the upside-down homeowner. Mortgage payments for many homeowners are
doubling, inflation won't fill the gap, and many in this new class of
homeowners are in trouble. Writing risky loans to unqualified home buyers is
generally stupid. Inflation covered up the mess for awhile but not anymore.
This summer
much of this nonsense will come to a head.
It is like
all financial scandals that involve Wall Street and real estate (remember the
Savings & Loan crisis): there are severe consequences. Generally, consumers
pay the cost of other people's gains.
This is how
the subprime tsunami works. The ocean recedes, people run to the beach and go
WOW, then the big wave destroys them and the property behind them.
Is it
really this dire? I hope not.
What do you
think?
--Bradley
Inman, publisher, Inman News
Inman Blog challenge: Click
here to join a reader discussion of this post.
***
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