Aug. 11, 2007

Credit Crisis? Not Really

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

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

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.

By Jerry Bowyer
Reprinted with permission from National Review Online.



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Add a Comment See all 40 Comments
by v_1618 August 11, 2007 12:48 PM PDT
WE ARE IN THE HANDS AND THE DOMINATION OF A
FEW CORRUPT PEOPLE WHO ARE THE OWNERS OF THE
INTERNATIONAL BANKS OR THE FEDERAL RESERVE
BANK. WHO MADE MONEY BACKING BY NOTHING WE ARE SLAVES
FROM THIS CORRUPT PEOPLE ....BUT TO KEEP
THEIR POWER THEY INVENT US ALL AROUND EUROPE
AND AMERICA THAT WE ARE IN WAR. TO KEEP THEIR
POWER MADE FROM NOTHING THEY ARE THE EVIL IN
THIS WORLD..LIKE HITLER FOR THE FEDERAL
RESERVE BANKS THE MOST LUCRATIVE THING !!!!IS WAR!!!
FORCES THE COUNTRY TO BORROW MORE MONEY AT INTEREST
THEY ARE THE MOST KIND OF THIEFS IN ALL TIMES OF
HUMANKIND. THE MONEY PAPER IS THE MOST ASTOUNDING
PIECE OF SLEIGHT OF HAND THAT WAS EVER INVENTED.
USURY IS THE MOST EVIL THING THAT MANKIND HAS INVENTED
IS THE DESTRUCTION OF ALL CIVILITATIONS.
USURY IS THE MONSTER AGAINST THE KINGDOM
OF GOD. AND THE U.N. IS MADE BY THE INTERNATIONAL
BANKERS. WHO CONTROL EVERYTHING AND CONTROL THE WAR
IN IRAQ AND IRAN SOONER. OUR RULERS ARE A BUNCH OF CRIMINALS
THE TRILATERAL COMMISSION IS THE WAY THAT ALL THE
PEOPLE AROUND THE WORLD WE'LL BE SOONER IN COMPLETE
SLAVERY UNTIL SOME REAL POWERS DEFEAT THIS EVIL ON EARTH.
Reply to this comment
by rushlimpdrug August 11, 2007 12:54 PM PDT
Nice movie review.
Can an article be any more stupid?
Maybe next time he can review "Clueless"
Reply to this comment
by shanev137 August 11, 2007 1:45 PM PDT
Plus, sub-prime mortgages had built in cost and insurance to cover their loses. PLUS, they get to keep the freaken house if it forecloses. LOL

Basically, huge profit-taking is going to occur in the stock markets and they will try to blame the plunge on sub-prime lending....and ignoramuses will suck it up.
Reply to this comment
by forthepeopl1 August 11, 2007 2:00 PM PDT
he loves bush, cant you read this trash
Reply to this comment
by cofmanaaron August 11, 2007 2:05 PM PDT
You know, there might be some sense in this article, I think our current economic woes are being blamed on the housing market when it is really the disasterous economic policies of our president that has been desroying the consumer class in the last 7 years through cuts in education support, health policy, and tax cuts and handouts being given to the wrong people.
Reply to this comment
by taxguydave August 11, 2007 2:12 PM PDT
This article is disingenuous at best.
If sub-prime loans were really a non-factor, the Fed wouldn't need to be pumping over $1 billion PER DAY of "liquidity" into the banking system. Billions of $'s of CDO's have already become worthless. CDO's are derivatives, what Warren Buffet has termed "financial weapons of mass destruction". It only takes a few of the loans in the CDO to default to make the securities worthless.
This has started a chain reaction. This has also depressed the prices of other mortgage-backed debt securities, including REMICs. In turn, the banks are forced banks to raise interest rates to make up for the lost income. This, in turn, has started to dry up the amount of money available for transactions like "leveraged buyouts" (LBOs). The drop in this activity has caused the prices of stocks to fall. And so on...
At least 3 multi-billion dollar hedge funds have become worthless in the past week because of this.
We've seen all of this before. Railroad bonds backed by insufficient collateral became worthless in large numbers late in the 19th century, eventually devaluing all markets and causing a period of "deflationary recession" (also known as a depression) in the 1880's and 1890's.
Over the years in my life as a financial professional, I have taken note for years that the most conservative elements constantly try to paint a rosy picture of the economy in order to defend the reckless financial practices of banks, the Fed, and the Bush administration.
Reply to this comment
by taxguydave August 11, 2007 2:14 PM PDT
This article is disingenuous at best.
If sub-prime loans were really a non-factor, the Fed wouldn't need to be pumping over $1 billion PER DAY of "liquidity" into the banking system. Billions of $'s of CDO's have already become worthless. CDO's are derivatives, what Warren Buffet has termed "financial weapons of mass destruction". It only takes a few of the loans in the CDO to default to make the securities worthless.
This has started a chain reaction. This has also depressed the prices of other mortgage-backed debt securities, including REMICs. In turn, the banks are forced banks to raise interest rates to make up for the lost income. This, in turn, has started to dry up the amount of money available for transactions like "leveraged buyouts" (LBOs). The drop in this activity has caused the prices of stocks to fall. And so on...
At least 3 multi-billion dollar hedge funds have become worthless in the past week because of this.
We've seen all of this before. Railroad bonds backed by insufficient collateral became worthless in large numbers late in the 19th century, eventually devaluing all markets and causing a period of "deflationary recession" (also known as a depression) in the 1880's and 1890's.
Over the years in my life as a financial professional, I have taken note for years that the most conservative elements constantly try to paint a rosy picture of the economy in order to defend the reckless financial practices of banks, the Fed, and the Bush administration.
Reply to this comment
by shanev137 August 11, 2007 2:28 PM PDT
Hey TaxguyDave....where do all the rich insurance companies who backed these mortgages sit in all this, and what about the "real property" that is still owned by all these "bad" sub-prime lenders?
Reply to this comment
by sharncedar August 11, 2007 2:29 PM PDT
"USURY IS THE MOST EVIL THING THAT MANKIND HAS INVENTED "

It's not money, rather the love of money that is the root of all evil. These bankers are not evil for collecting and processing money, they are evil for prizing the pursuit of money over their country, their fellow citizen's lives, and their sacred honor.
Reply to this comment
by sharncedar August 11, 2007 2:38 PM PDT
"what about the "real property" that is still owned by all these "bad" sub-prime lenders? "

Great question. What about all that property, all those nice houses, aren't they worth something. how much is a house "worth"? The trivial bankers answer is what a buyer will will pay, but that doesn't factor out inestment bubbles. a better measure of an investment is the raw productivity it creats - for a house, it is the premium that an employee living at the house will experience in productivity due to an enhanced ligfestyle and sense of ownership. Beause real wages have been held so low, this actual value is extremely low relative to the insane inflated house prices that were create dby currency mainuplation rather than actual productivity gains of the workforce. That is, the kind of person who could live there can't afford it based on their wages. Meaning the "property" is nearly worthless compared to the mortgage amount. No one suffering under stan bush's economic regime could afford to buy these houses, except through speculative loans. Certainly at 20 times their yearly income, its not a viable customer to buy the property.

Who was really buying ll those properties were not the "homeowners" but one bank giving the money to a fool to buy the property from another banks, the banks were using the properties to exchange capital and create loans. the people never owned anything.
Reply to this comment
by sparks224 August 11, 2007 2:55 PM PDT
Oh I see, it's just Social Darwinism (the neo-con religion) working it's magic.

Social Darwinism is very similar to what the Nazis believed, but with the superior and inferior being less defined by race.

Reply to this comment
by sparks224 August 11, 2007 3:00 PM PDT
Didn't the the NRO recently have an article titled:
The Invasion of Iraq, a Bad Idea? Not Really
Reply to this comment
by wogerwabbit August 11, 2007 3:13 PM PDT
When is a orange an apple? When NRO writes about it.
Reply to this comment
by taxguydave August 11, 2007 3:16 PM PDT
Hey TaxguyDave....where do all the rich insurance companies who backed these mortgages sit in all this, and what about the "real property" that is still owned by all these "bad" sub-prime lenders?
Posted by shanev137 at 02:28 PM : Aug 11, 2007

-----------------------------------------------

SharnCedar did a good job of answering this. I would like to add that most subprime mortgages are uninsured. The CDOs pass most of the risk from the banks to the derivatives investors.
Reply to this comment
by shanev137 August 11, 2007 3:17 PM PDT
So Sharn...it's basically just super-rich people who didn't get as rich as they wanted off sub-prime lending, and now they want to be bailed out by the feds.
Reply to this comment
by roger_inkart August 11, 2007 3:34 PM PDT
Oh no! The NRO is saying this is NOT a crisis? Good Lord - head for the hills everyone! We're DOOMED!!!

Seriously, I can only imagine how this article would have been spun the other direction if the GOP and the Bush administration hadn't been running the show lo these many years.
Reply to this comment
by shanev137 August 11, 2007 5:06 PM PDT
Basically, rich people who "indirectly" made loans to poor people with bad credit, want to blame the next recession on the fact a few of them can't keep up with their mortgage payments because of the inflation that rich people created.
Reply to this comment
by ramos937 August 11, 2007 5:39 PM PDT
To Jerry Bowyer, National Review Online.

I wonder what planet you have been living on? I very much wish that the Comptroller General (head of the GAO), could spend at least 20 minutes with you. The CG is telling the American public the true financial position of the USA. Whatever the administration is the 2007 deficit, you need to multiply it by 2.5, our true overall debt is not about $8.5 trillion it is about twice that much. Do you not ever watch 60 Minutes.

BE a patriot and go interview the CG before you write more articles like this.
Reply to this comment
by lawyertom1 August 11, 2007 5:50 PM PDT
Part 1. One has to be skeptical when the NRO says "what, me worry?". TaxGuyDave makes some good points. But what many of you are missing is the fact that those who package CDOs, who buy CDOs, who insure CDOs, etc. etc. are often highly leveraged [translate: small equity, lots of debt], and who knows about the buy-back requirements in the CDO contracts [the what? wake up and smell the reality]. As such, it does not take much to push them over the edge. Leverage is fab, just fab darling, on the upside [the return on your puny equity investment is very nice, thank you], but a real bummer on the downside [your puny equity is wiped out and you have to sell other assets like mad to cover debt]. So, it is not the percentage issue that matters, as NRO implies, it is how all this dreck is package, sold, and how it is held, and by whom. When a highly leveraged French bank, just to pull an example out of the speculative air, buys a bunch of CDOs and uses them to meet capital requirements, then the guano hits the proverbial fan when the CDOs go south. Thus, the ECB pours billions of euros into their system. The Fed then follows suit to keep everyone happy and secure (there is nothing like billions to create that warm, fuzzy feeling).
Reply to this comment
by lawyertom1 August 11, 2007 5:54 PM PDT
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.
Reply to this comment
by lawyertom1 August 11, 2007 5:54 PM PDT
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.
Reply to this comment
by shanev137 August 11, 2007 6:12 PM PDT
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.
Reply to this comment
by sjc_1 August 11, 2007 8:10 PM PDT
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.
Reply to this comment
by sparks224 August 11, 2007 8:33 PM PDT
"...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.
Reply to this comment
by walt1944-2009 August 11, 2007 9:35 PM PDT
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!!!



Reply to this comment
by ubrew12 August 12, 2007 12:08 AM PDT
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.
Reply to this comment
by strewthmate August 12, 2007 2:23 AM PDT
... 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
Reply to this comment
by shanev137 August 12, 2007 4:48 AM PDT
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.

-------------

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?
Reply to this comment
by sjc_1 August 12, 2007 11:42 AM PDT
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.
Reply to this comment
by horse3farm August 12, 2007 12:50 PM PDT
Do any of you people know how to read?
Reply to this comment
by starleo146 August 12, 2007 3:03 PM PDT
Don't be surprised you wake up with this Bush we have a different currency.
Reply to this comment
by fascistusa August 12, 2007 6:04 PM PDT
ZEITGEISTmovie.com.

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

Yeah. The Future is grim.
Reply to this comment
by lastdance2 August 12, 2007 6:12 PM PDT
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
Reply to this comment
by fascistusa August 12, 2007 6:16 PM PDT
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??
Reply to this comment
by wogerwabbit August 12, 2007 9:21 PM PDT
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.
Reply to this comment
by Razzl August 13, 2007 9:54 AM PDT
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...
Reply to this comment
by andor3 August 13, 2007 12:43 PM PDT
THANKS razzl and other commenters!

It was bound to happen, especially with NRO: the comments are more enlightening and informative than the essay.
Reply to this comment
by hwk_i67 August 13, 2007 1:03 PM PDT
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.

Reply to this comment
by andor3 August 13, 2007 1:35 PM PDT
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.
Reply to this comment
by sjc_1 August 13, 2007 10:55 PM PDT
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.
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