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Numbers and USA Mortgages

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.
[...]

And here.


[...]
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.

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Your introduction says it all: "by perma-bear Nouriel Roubini". The average annual return of the S&P 500 Index has been 10.83%, since its inception in 1957.  Like a broken clock which is right twice a day, Roubini and his ilk have got to be right sometime,,,and they make their living with the MSM, and now a website in his case, based on occassionally being right.  Dean Baker makes a good point that many were caught in the euphoria of the tech boom, but that was the end of a 10 year market run, and if you went with a permabear, you missed the whole thing.  You're far, far better off just putting your money in the S&P 500 and the MSCI EFA and let it ride than listening to this yoyo.
by wchurchill on Wed Feb 28th, 2007 at 02:02:55 PM EST
He is indeed right on this one, though. This isn't the first time that a large portion of the economy has devolved into a pyramid scheme in order to extract greater profit margins when there is no other avenue remaining to increase said profits. The tech bubble, S&L crisis, etc, etc.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Feb 28th, 2007 at 05:25:55 PM EST
[ Parent ]
I acknowledge this of course since I put "perma bear" tag, but that's not the point of this article which is about MSM spinning a number with a quite dishonnest real definition (and of course no way to their reader/listener to know this except by reading perma-bear blogs).

To be noted, Barry and others just got a peak in hits following the stock downside.

by Laurent GUERBY on Thu Mar 1st, 2007 at 04:22:43 AM EST
[ Parent ]
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.

Guess I must be old fashioned, or just plain poor.  I can't ever recall being actually involved in a "consumption boom."  Almost every thing I own is almost as old as Europe (cars, tele, etc) even though our house value (financed with a 30yr fixed of course) did boom until the recent bust.  Oh, about 5 yrs ago we did buy a new, but modestly priced, stereo system to replace the 30 yr old one.


I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Wed Feb 28th, 2007 at 11:12:50 PM EST
A snip from How the World Works:

Where is David Lereah? The always-look-on-the-bright-side chief economist of the National Association of Realtors got a fair amount of media play yesterday, when he used a mild monthly bump-up in existing home sales to declare that the bottom of the housing market had been reached last September. But today, with new home sales going off the cliff (in the West, new home sales in January were 50 percent lower than a year ago!), he's nowhere to be seen.

One reason is that the existing home sales data was released by Lereah's trade group, while the new home sales numbers come straight from the Commerce Department. But if I were him, I wouldn't be taking calls today, because any way you cut it, today's new home sales numbers, in conjunction with last week's housing start figures, are bad news for those looking for a rebound. If it weren't for Tuesday's stock market plunge, the 16.6 percent monthly drop in new home sales would likely be the lead economic story. Not least because the numbers add fuel to the already blazing debate about whether troubles in the subprime lending industry are going to move into broader territory.

[Some] analysts, like Bloomberg's Caroline Baum, are already suggesting that risky business is set to spread from the subprime sector (where, by definition, we expect defaults to happen) to more reputable corners of the lending industry. In her column today, Baum writes that stress is spreading from subprime loans to what are known as "Alt-A" loans -- mortgage loans made to borrowers who have good credit ratings but don't want to provide complete documentation on their income and assets.

It is worth reading all Leonard's blog reports (and links) since yesterday.

If I understood well, the sell off in Shanghai started out of concern that the Chinese government was going step up its efforts to curb speculations in the stock market, and perhaps real estate market as well.
That is what capital gain taxes, raising interests or reducing the money available for lending are for. This makes the following model sensible: all this globalization process has the core function to postpone recessions or collapses in traditional markets (especially US), by vastly expanding the pool of new market participants, and solving one bubble problems by greater bubbles elsewhere or across the world. That may continue until the globalization hits the limits of this finite world. China is a huge new space for a few more bubbles. But once Chinese government shows some intent to limit the bubles, markets get very nervous acroos the globe. No ingenuity can keep insanity forever.

by das monde on Thu Mar 1st, 2007 at 08:05:27 AM EST
That may continue until the globalization hits the limits of this finite world. China is a huge new space for a few more bubbles. But once Chinese government shows some intent to limit the bubles, markets get very nervous acroos the globe. No ingenuity can keep insanity forever.
One person's insanity is another person's consistent growth, I guess--check out this chart.  If there were stock market charts available back to 1500 they would likely have this same slope.  IMO, human ingenuity will continually improve our lot.

But as this chart shows, growth has ups and downs, as it has in the last five years.  This current down will likely be another bump in the road on another long economic boom.  Before the 2001 mini-recession we had a boom that lasted from Bush Sr, through all of Clinton, and through the second month of George Jr, 10 years in total.  I would think we're in the middle of another one--at least until 2010.  But only time will tell.

by wchurchill on Thu Mar 1st, 2007 at 07:50:20 PM EST
[ Parent ]


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