Credit Crisis? Not Really

National Review Online: Sub-Prime Mortgage Market Woes Are Greatly Exaggerated

(National Review Online)  This column was written by Jerry Bowyer.

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Ben Stein said it well this past Saturday on Fox’s Cavuto on Business: The sub-prime mortgage problem is grossly overstated; the sector is just too small.

Smart guy, Ben. Ferris Bueller never should have skipped school that day — he would have learned economics from a master. (Stein, for those who might have missed it, played Bueller’s (Matthew Broderick’s) high-school teacher in the pop hit, Ferris Bueller’s Day Off.)

But let’s switch movie metaphors for a moment. In Rain Man, autistic savant Raymond Babbitt (Dustin Hoffman) is asked two economics questions by Charlie, his money-loving younger brother (Tom Cruise).

Charlie: Raymond, how much does a candy bar cost?
Raymond: About a hundred dollars.
Charlie: Raymond, how much does an automobile cost?
Raymond: About a hundred dollars.

The questions are designed to reveal a systematic flaw in the way Raymond looks at the world. For all his skill at counting the minutia in life (like toothpicks), he just doesn’t understand the issue of scale. He doesn’t have an inherent sense of how big things are.

I’ve thought a lot about Rain Man over the past few months as I’ve been following the press coverage of the sub-prime mortgage crisis. The story’s been on the front page of the Wall Street Journal nearly every day. Pretty much every show on CNBC — except Kudlow & Co. and one or two others — has been obsessed with the topic. Yet no one seems to be asking the Rain Man question: “How big is the sub-prime mortgage market?”

And the answer, as Ben Stein makes clear, is not very big at all.

Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.

So, all in all, when you work through the details and get down to the number that really matters, only about 0.6 percent of U.S. mortgages are currently in foreclosure. That’s up a hair from roughly 0.5 percent last year. That’s it.

Actually, that’s not it. Things are actually better than the numbers suggest, since sub-prime-mortgage homes are less expensive than prime-mortgage homes. This makes sense. Wealthier people, generally, can afford costlier homes than less-wealthy people. The recent sub-prime surge brought large numbers of moderate-income families into the home-ownership market, and their houses are less expensive than most. Therefore, the dollar impact of the sub-prime default is smaller than if it were a prime default.

With approximately 254,000 mortgages in foreclosure at the moment — up from roughly 219,000 last year — the sub-prime meltdown has given us an increase of 35,000 mortgage foreclosures over the last quarter. Since the average sub-prime mortgage clocks in at almost exactly $200,000, we’re looking at an approximate $7 billion increase in foreclosed value in the first quarter of this year.

Raymond, how big is household net worth in the U.S.? About a hundred dollars?

Actually, it’s a lot bigger than that — about $53 trillion. In other words, the recent increase in sub-prime foreclosures amounts to 0.01 percent of net U.S. household wealth.

That’s toothpicks, Raymond.

[sjc_1]

THAT is precisely it. The housing sector since 2002 has been touted as THE shining light in the economy, not good jobs, autos or anything else. Here we find out it was boosted by phony baloney loans that were not sustainable and bound to crash.

So much for Bush's "robust" economy based on deficit bloating tax cuts for the rich and rigged fast and loose loans. G.W.'s brother Neil must have taught him all about fast a loose deals that could create the illusion of prosperity. Neil's times in the S&L business during the 80s taught him all about rigging deals.

[andor3]

Hwk_i67 said: "that is a lot people who's purchasing power is greatly affected, which in turn affects the retailers, the restaurants, etc. It's trickle down econ 101."

Even more, the housing sector is often cited as the only strong part of the present economy. The housing sector: homes sold and built, is fueled by mortgage money. And not just sub-prime mortgages, but also adjustable rate and interest-only payment schedule borrowers are in big trouble if houses stop appreciating in value.

You have to look at not only the foreclosures, but those on the edge of foreclosure and what would push them over.

[hwk_i67]

I've seen some pretty interesting comments about this article and in this article. First of all, for the NRO to say "it's not that bad," it's worse than it seems. I'm in the mortgage lending business and what I see everyday makes me want a career change to McDonalds.

NRO sights that the average sub-prime mortgage that is currently in forclosure is around $200k. Times 254000 loans in foreclosure, that equals $25.4 billion dollars lost.

What's the big deal? Well. Every single person that is employed in this pipeline is being greatly affected by this. Loan officers, title companies, builders, appraisers, insurance agents have all felt their business greatly impacted by this. Now, before the collected "boohoo" starts, that is a lot people who's purchasing power is greatly affected, which in turn affects the retailers, the restaurants, etc. It's trickle down econ 101.

[andor3]

THANKS razzl and other commenters!

It was bound to happen, especially with NRO: the comments are more enlightening and informative than the essay.

[Razzl]

Maybe NRO should stick to politics and leave the economic side of conservatism to their fellow travellers at the business publications. Not only are the statistics offered up woefully outdated, but NRO fails to show any understanding of the underlying structural issues. Mortgage money isn't primarily being offered up to the marketplace by banks as it was in '80's during the savings-and-loan crisis, it's being offered by private investment pools, and unlike banks who function as an arm of government policy during financial crises, the private investors shut down their cash flow to these investments last week in order to preserve themselves when institutional buyers began refusing to buy the loans. It isn't just a sub-prime crisis any more, it's a crisis for all segments of the mortgage industry, involving tens of millions of new mortgages, not just a few thousand old ones. What makes NRO propagandists rather than intellectuals is their habit of presenting opinion papers on stuff they know nothing about in order to bolster their settled opinion rather than studying a problem in order to understand it before having an opinion...

[wogerwabbit]

I have 4 financial advisors as clients and all of them are absolutely freaking out at what's going on with the markets. One is saying that we are on the verge of a depression like we've never seen before (and the others are not much more optimistic).

The Chinese virtually own America and will call in the debt and we'll all be screwed (probably right after the '08 Summer Olympics if not before).

They all say sell all your stocks and get into precious metals... the value of gold is going to go up over $900/oz.

My advice is to learn how to grow your own food, because next year, you won't be able to afford to buy it unless you're rich.

Hard times are coming for us little people. Consider what will happen whan thousands, if not millions of city dwellers leave their homes in search of food. It sounds like a great science fiction novel, but ithe reality of it is not unconceivable.

[fascistusa]

ZEITGEISTmovie.com.

The American/Israeli Elite plan on introducing The Amero - America, Mexico, and Canada's New Currency.

Yeah. The Future is grim.

CBS"news" puts a REALLY long, worthless comment after I comment. Wonder why??

[lastdance2]

Topic :
The robbery of the century
By Chan Akya (Asia Times Online)


I have previously written about the impending failure of US mortgage borrowers, whose failure to pay would affect not only the US economy as many of them declare bankruptcy.
But the risk has been widely sold to investors in other countries, with the bulk of the losses coming in Asia.

It almost seems poetic justice that the manipulators are given losses by the very people they think they are helping, namely over-consuming Americans.

But American borrowers will emerge in essence unscathed from all this. The intermediate companies, which will of course declare bankruptcy, thus leaving empty shells for lenders to pursue.

This is one of the greatest robberies of our time, and it will go unreported in essence. Hard-working Asian savers will see their central banks post billions of dollars in losses on the US mortgage crisis. But nothing can be done about it given the general lack of accountability across Asia.

Asians simply do not hold their governments and central banks accountable for performance. This allows all kinds of excesses to be permeated. They should invest in their own countries instead of in some distant delinquent borrower.

Perhaps it is time for citizens to raise the question with their central banks: Just whom are you working for, your citizens or American homeowners?

Source :
Asia Times Online (Jul 14, 2007)

Lastdance

[fascistusa]

ZEITGEISTmovie.com.

The American/Israeli Elite plan on introducing The Amero - America, Mexico, and Canada's New Currency.

Yeah. The Future is grim.

[starleo146]

Don't be surprised you wake up with this Bush we have a different currency.

[horse3farm]

Do any of you people know how to read?

[sjc_1]

I was referring to the refinance market being affected by the sub prime situation. Someone asked how that could affect the overall economy. Consumer has been a large part of the U.S. economy and if they stop buying because the refinancing is not there on their homes, then consumption slows and the economy slows. Creating the illusion of prosperity by using debt to refinance your home is not the same is actual productivity based prosperity.

[shanev137]

It seems to me that for quite a while, people have been using their home refinancing like an ATM machine. They buy cars and take trips using what they think are profits, but are actually just more debt.

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It's called responsible lending. The builders and lenders are the greedy and stupid ones who financed all these huge McMansions with no money down, with no proof of income and poor credit. The builders, lenders, and buyers deserve to go down in flames together. Why should my tax money go to bail out all these stupid greedy morons who tried to hit the lotto and cash in?

[strewthmate]

... fear not folks (imagine cynical tone in voice) because the "Plunge Protection Team are Working Overtime" blowing hot air under the bubble so it doesn't hit the ground and burst.

see: http://www.sirchartsalot.com/article.php?id=65

[ubrew12]

NRO: Nothin' to see here folks, just move it along, move it along.

Ya see, PEOPLE are no longer a large part of the ECONOMY, so when they lose their homes it doesn't MEAN ANYTHING.

Regarding the financial impact, I'll take LawyerTom1's explanation over NRO's anyday. NRO is clearly trying to prevent a panic sell in a risky market.

[walt1944-2009]

I really wonder where most of these neocon financial analysts who argue that the financial mess on Wall Street isn't such a big deal have their brains. They obviously are not in their heads and must be more where they sit.

It's very easy for an "armchair analyst" to sit in an comfortable office, look at "doctored" statistics and draw a conclusion that there is nothing to worry about, everything is fine and everyone else is just paranoid.

Tell that to all those people who had to walk away from their nice homes when the monthly mortgage doubled over night! Tell that to the guy who just lost his job in the "booming" economy of George Bush 2 and doesn't know how he is going to hang on to his house, let alone afford the high taxes, utilities, insurance, even food for his family; food that is made in China, is expensive (where are all these cheap goods Bush Sr and Clinton were bragging about to get NAFTA and CAFTA passed?), and is tainted, all with the knowledge of the supplier.

SIG HEIL, BUSH!!!

[sparks224]

"...we're talking about the Fed bailing out rich people again..."
Posted by shanev137

Well thank goodness the Fed is not going to bail out any working people.
If they did that they'd be Communists.

[sjc_1]

I seems to me that for quite a while, people have been using their home refinancing like an ATM machine. They buy cars and take trips using what they think are profits, but are actually just more debt. This is what has been keeping a lot of the economy moving the last 5 years. THAT is why this is such a big issue. 2/3 of the economy is consumer and when that stalls, the economy stalls.

[shanev137]

Like I said, no matter how you all want to slice and dice it....we're talking about the Fed bailing out rich people again. Bailing out rich people who signed up to gamble money on risky investments.

[lawyertom1]

Part 2. In any case, there is an obvious lack of understanding by some of our commentators re how these jokers play the game and why it sometimes goes south. The NRO unfortunately displays the type of ignorance one would expect from the NRO, and any high school freshman. For those of you new to these issues, go back and follow the economic literature for the last five years and you will see that these types of problems have been a major concern of the truly intelligent. Now, the pigeons are coming home to ... who knows? Little early to tell.