by Laurent GUERBY
Wed Feb 28th, 2007 at 11:19:02 AM EST
I can't resist to post a big chunk of this nice piece by perma-bear Nouriel Roubini:
Now even mainstream media and mainstream analysts regularly speak of the sub-prime "meltdown" or "carnage" and refer to these sub-prime mortgages as "garbage" or "trash". Since most of these sub-prime mortgages were junk that should have never been originated in the first place, now the new spin in financial markets is to minimize the nature of the problem by making two arguments: first, sub-prime loans are only a very small fraction of the housing market, specifically only 6% of it; second, sub-prime problems are a niche problem that is not affecting other parts of the mortgage market. Both arguments are utter spin without any basis. Let us see why.
Where did the Mortgage Bankers Association (MBA) get the "sub-prime is only 6%" figure that it is spinning around in every possible media?
Their trick is to consider all homeowners, even the 35% of homeowners who do not have any mortgage and then argue that only 6% of homeowners are sub-prime borrowers. Why is this spin and why is the actual figure for "garbage" mortgages actually closer to 50% of the flow of new mortgages in 2005-2006 rather than the "6%" being spinned around? Several reasons.
Let me elaborate:
1. Sub-prime are now 13% of the stock of mortgages, not 6%.
2. Sub-prime mortgages were at least 20% of mortgage originations in 2005 and 2006.
3. The same "monster" lending practices used for subprime mortgages were also used for most "near-prime" and "prime" mortgages.
4. Many pseudo "near-prime" mortgages (such as Alt-A) are undistinguishable from sub-prime ones and have now sharply rising default rates
5. What is defined as sub-prime is subject to highly cosmetic accounting by banks: the rule that FICO scores of 660 or below are sub-prime is often diluted down to 630 or even 620 to exclude many mortgages from a sub-prime classification.
6. Counting all of the categories above, subprime-like mortgages accounted for almost 50% of all originations in 2005 and 2006 not the 6% figure spinned by the industry lobbies.
Read the rest here.
And some more by Dean Baker here
Listening to NPR and reading the business press commenting on yesterday's Wall Street selloff, I repeatedly see the phrase "look to the fundamentals." This is good advice, but I can't imagine which fundamentals these folks are looking at, since the fundamentals seem to reassure them.
When I look at the fundamentals, I see front and center an unprecedented explosion in house prices. From 1953 to 1995 house prices track the overall rate of inflation closely. From 1995 to the present, house prices have risen by 70 percent in real terms. No one has an explanation for this run-up based on the fundamentals of the housing market. (The lack of any significant run-up in rents seems to disqualify any explanation based on conditions of supply and demand in the housing market.)
This run-up in house prices has created more than $5 trillion in housing wealth. This has spurred an extraordinary consumption boom, pushing the savings rate into negative territory for the first time since the beggining of the Great Depression.
Just to remind everyone about the accuracy of econometric forecasters and the lack of consequence in this profession for being completely wrong, in the fall of 2000, not one of the fifty "Blue Chip" forecasters saw the 2001 recession coming.