Tuesday, August 5, 2008

Remember the Real Villains of the Mortgage Crisis

Think only stupid, greedy people are losing their homes in the mortgage mess? Guess what: You're Next.

Housing Lenders Fear Bigger Wave of Loan Defaults

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

(More after the jump.)

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes.

Wonder how it happened? How millions of intelligent, educated, middle-class Americans got sucked into mortgages that blew up in their faces and destroyed their lives? The Nation explains, through the story of George Wright, who owned his modest home in Atlanta for almost 40 years. Until the mortgage crooks got him.

The vast majority of homes facing foreclosure are owner-occupied. Aggregate data on those homeowners is spotty at best, but consumer advocates insist they look a lot like George Mitchell--people shoved into large, needless loans so that lenders could profit from the fast-growing securities market.

Much has been written about the role of the byzantine derivatives trade in the housing market's balloon and bust. Investment banks have been bundling pools of mortgages and selling them as securities since the mid-'80s. But when the housing market exploded in the early 2000s, those pools became immensely profitable. Banks started gobbling up mortgages from lenders, who in turn frantically cranked up their lending volume to cash in on the new demand. Brokers raked in money as banks offered incentives for them to close larger and larger loans. Investors worldwide poured cash into the profitable mortgage pools that formed.

If the securities market was the bonfire, borrowers were the kindling. Had lenders not sought out and made loans to people without regard to their ability to pay, the fire would have burned itself out long ago. Instead, when the supply of reliable borrowers was depleted, the subprime lending products that Reagan-era deregulation helped usher in kept the flames lapping. Undocumented loan applications, interest-only payment plans and teaser interest rates are all just the tools lenders used to forage for new borrowers. "The purpose of those products was to convince these people that they could get in," says Legal Aid attorney Bill Brennan.

Read the whole thing.

The Associated Press offers a Q&A on what the new Hope for Homeowners Act of 2008 actually offers.

And Paul Krugman explains why it won't help much.

Cross-posted at Blue in the Bluegrass.