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Watching an industry go boom

I've been absorbed in watching the sub-prime mortgage market collapse lately. Part of this is driven by the fact that I have close personal family members caught up in the fallout. It's been about as fascinating as a train wreck, for about the same reasons.

The thumbnail sketch is this: "Sub-prime" refers to mortgages given to people who don't qualify for the usual ("conventional") mortgage because they're higher risks for defaulting. The companies that offer and service sub-prime mortgages rely on other financial institutions to buy these mortgages, providing more money for operations and other mortgages. But customers are beginning to default on these mortgages in larger numbers than before, due to the not-quite-perfect economy. The big corporate mortgage buyers are getting skittish over possible losses, and in the last week or so have started really pulling back on their funding. On Friday, the headlines included news of American Home Mortgage suspending its operations — but it was far from the only one, just the largest that day. My sister got to work on Monday to learn that her company had suspended operations. There was no official word until about 2 p.m. when a large mortgage buyer in California confirmed its own course of action, which sank my sister's company. They declared some form of bankruptcy today and closed.

News in the traditional outlets seemed to be slow in coming. I guess that's a natural feeling when you're close to a part of a story. The sub-prime market isn't necessarily huge; it's not oil, say, so the media was covering the large drop in oil prices and the new CEO at Chrysler. I spent a lot of time looking for information on the Web, finding most of it in small industry sources like the Mortgage Lender Implode-O-Meter, BlownMortgage.com, and message boards intended for brokers. The latter were full of "Help! So-and-so is gone! Where'm I going to place this loan?" and "Say it isn't so!" messages.

It was kind of scary, in a way, because I got caught up in it. Stepping back, of course, I see the stock markets go up and oil prices go down and most other industries just chugging along. Still, it makes me wonder how much further it'll go, where the tentacles will stretch and what the medium-to-long term effects are. For instance, The Daily Show with Jon Stewart, in its comedic way, made the point that sub-prime mortgage problems affect minority group members significantly. As another example, a reduction in eligible homebuyers might mean construction industry problems.

I'm having an easy time envisioning scenarios that could all end in tears. But I only had two classes in economics in college, so what do I really know? Except that I already know more than I did about the savings and loan industry crisis of 1987. Not that that'll be all that helpful, except for possibly understanding what's happening if the economy goes into a recession again.

In the meantime, anyone need someone who's experienced in processing the final paperwork of a mortgage? I know someone who's available.



( 6 comments — Leave a comment )
Aug. 8th, 2007 10:17 am (UTC)
Just part of the trend
Look at the moron "leading" this country. He starts at the top of every company he works for and tears it down through his own stupidity. Why should the USA be any different? I just hope this country can outlast his rein of error. The sad thing is that the damage he has done will last decades.
Aug. 8th, 2007 11:06 am (UTC)
Re: Just part of the trend
The problem is that the US has become a plutocracy. A small minority of extremely wealthy individuals actually control what happens in government policy. They can buy the way into office for their preferred candidates by hiring the cleverest most expensive publicity firms and literally owning the media. Voters have an illusion in some cases that they are still in control but they are not.

Bush and his ilk have not done any harm to these wealthiest people. Quite the contrary. So we are approaching the Marie Antoinette syndrome, where those who are actually in control don't have to care what happens to the general populace.
Aug. 8th, 2007 06:02 pm (UTC)
Re: Just part of the trend
I'm certainly not disagreeing with any of the basic points. I'd add that the president and his administration have at least indirectly encouraged the irresponsibility in the credit markets rather than discouraged it.

I'm not totally sure the problem began under the Bushies, though; when did sub-prime mortgages become accepted? Possibly in the later years of Clinton's administration, or maybe not. I'd need to research.

However long it has been, we've been building up to the meltdown, and at any point borrowers, lenders, or the secondary market could've said "Wait! This isn't smart." They didn't until it was too late. Again, there was no one in any position of authority advising caution, or if someone was then no one was listening or reporting. Apparently it was thought that Camelot would never end.

I've heard it said that a president only has a limited effect on the economy. Something about being the leader of a nation of 300 million being similar to herding 300 million cats, I think. (Don't quote me; that's vastly approximate.)
Aug. 8th, 2007 06:43 pm (UTC)
Re: Just part of the trend
The low interest ARM was around way back in 1984 when Gary and I bought our first house. It's not new. Ronald Reagan was president at the time. I rejected it then and I still reject it as not a good choice for anyone who actually wants to own property. It isn't appropriate for those who just want a tax deductible housing payment either because the payments are artificially low. It only works if you never intend to build equity but do intend to move again within two or three years. That's a common yuppie behavior, or at least was back then. The viability of that mobile approach depends on an active real estate market that will let you resell the property before the balloon payment comes due. Hence the difficulties we are seeing today for so many people. They can't actually make the balloon payment, they can't find a buyer for the price it would take to cancel out the payment, and they can't refinance because lenders are tightening up the requirements due to all the defaulting. Hence, we get more defaults, and it becomes a positive feedback loop...

Sure, the president himself has only a generalized effect on the economy. Changes to the economy move slowly as a rule, and take years to have much effect. However, the overall policies of an administration, especially if backed by the Federal Reserve, do have an effect within the four to eight years that the administration lasts. Unfortunately, the effect is not always detected until after the administration already changes, and consequently the public blames it on the wrong people. That was true of the Great Depression, which was blamed on the Hoover administration but had its origins in the policies of the Taft and Coolidge administrations. Clinton was elected in part because Bush Sr. was getting the blame for the policies of Reaganomics, which didn't work as promised.

I think social and economic
Aug. 8th, 2007 11:03 am (UTC)
Familiarity with financial paperwork should transfer to other phases of the banking and lending industry, so hopefully your sister can find something before long. I'd encourage her to look in that wider arena if possible.

Yes, I think there's a full scale house of cards collapsing there, and the collapse is long overdue. I've been predicting it for several years. The construction and development industries are already affected here. The evidence is clear. Small developers, like the ones who started those two hateful subdivisions on the northern line of my own property have almost ground to a halt. Nothing is happening there because they either have no buyers or the buyers aren't starting construction. The newspapers here have pages full of auctions and mortgage default filings. Literally five or six pages at a time in little weekly papers. I think that's a clear sign that things are collapsing all the way down the chain. Those balloon payments on overpriced houses are coming due, and refinancing is not available to the people who got the cheap mortgage five years ago.
Aug. 8th, 2007 06:09 pm (UTC)
In a way, this could be good if it forces a halt to sprawl. But that's probably wishful thinking; after a short hiatus they'll be back, turning farms and green space into suburbs and leaving behind blight where there should be vibrant cities.

My sister wasn't terribly enamored of office work (though that could've been mostly office politics that she didn't like). Before this job she managed movie theaters, which isn't exactly a growth industry either but at least she liked it. It's probably too soon to know what she's going to do, except that she needs a vacation so she'll use her unemployment benefits to just regroup for a while.
( 6 comments — Leave a comment )

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