Friday, August 31, 2007

Borrowers Paying Price for Bush's Increased Availability of Credit

Over two years ago President Bush bragged on the just passed Bankruptcy Bill. "These commonsense reforms will make the system stronger and better so that more Americans - especially lower-income Americans - have greater access to credit." After signing the bill he added "By making the system fairer for creditors and debtors, we will ensure that more Americans can get access to affordable credit."

According to the BBC subprime loans ballooned the last few years. The quality of those loans is rapidly deteriorating according to another report. Loans made last year have nearly a 15 percent delinquency rate, a faster growth rate than any other year. An industry expert says the most recent loans in 2007 are not performing much better.

During the Bush years, mortgages changed dramatically. In 2001 roughly 85% of loans were the 30 year fixed rate kind. In 2006 ARM's or adjustable rate mortgages comprised 45% of housing loans. Subprime mortgages fall into the ARM category. according to the testimony of FDIC Vice Chairman Martin Gruenberg:

The subprime mortgage market accounted for a relatively small share of total mortgage originations until a few years ago. But at the same time that nontraditional mortgages began growing rapidly a few years ago, subprime mortgage lending also began to escalate. The subprime share of mortgage originations grew to over 20 percent by 2006 compared to 5 percent in 2001. Subprime mortgages account for about 14 percent of first lien mortgages outstanding and represent about 7.5 million loans.

The volume of dangerous loans tripled under Bush's watch. On top of the 2 million currently delinquent and facing foreclosure, some 2 million more subprime loans will reset in 2007 and 2008, with many expected to default. Mr. Gruenberg went into great detail regarding the structural problems with such loans. They include low teaser rates which can rise as much as six percentage points, not verifying the borrower's income, huge prepayment fees, not escrowing insurance and taxes, and piggybacking loans. Wouldn't one expect some of these practices to be addressed in a bill that "ensured more Americans can get access to affordable credit"? Apparently not, even thought the FDIC identified such predatory lending practices in 2001.

Until the bubble burst, who made out like bandits off these risky mortgages? Wall Street investment houses did via the securitizing of loans. Mr. Gruenberg stated:

In 2006, over 70 percent of the subprime mortgages originated were securitized. Most of these mortgages made their way into the so-called private label mortgage backed securities (MBS) market. Subprime MBS accounted for about 40 percent of private label MBS last year. The rapid growth of subprime lending and securitization helped drive the private label share of total MBS to 56 percent last year from 18 percent in 1999. This development represents another significant shift in the mortgage industry.

Wall Street investment houses expect their several year run of record profits and bonuses to come to a screeching halt. The BBC reported:

The credit rating agency Standard & Poor's estimates that investment banking revenues could fall by nearly 50% in the second half of this year because of exposure to non-performing mortgages and loans. In the case of Goldman Sachs alone, that would be a drop of $1.75 billion.

One can understand Treasury Chief, Hank Paulson's concern as ex-CEO of Goldman Sachs. An industry based on securitizing mortgages virtually vanished overnight. Who will fare better from government help, the investment houses, the individual mortgage holder, or the 40,000 people who lost their jobs due to the crash?

The relief President Bush announced today will help 80,000 mortgage holders refinance through the Federal Housing Authority. That addresses about 10% of the potential problem, but we're used to that given the President's efforts to reduce the number of uninsureds in our country. Homeless and without health insurance, that sounds like a double whammy...