More mortgage loan problems

The financial problems caused by the subprime mortgage market is spreading. It is a big problem that is currently getting larger, and it was easily predictable. It was caused by the political manipulation of the housing and mortgage credit market to allow the Bush administration to mismanage the economy but not pay the political consequences before he ran for reelection in 2004.

The problems today were caused by Alan Greenspan, but he did it for a good cause. He knew that George Bush had to be reelected President in 2004. So what does the problem look like today?

From this morning's New York Times:

When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.

Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.

The problems are both with borrowers who have poor credit and with other borrowers with better credit who were sold loans which were too risky, such as Adjustable-Rate Mortgage Loans with an initial monthly mortgage payment that in some cases did not even cover the interest owed for that month. The interest was simply added to the existing loan to be paid off later.

From The Associate Press, published in the Fort Worth Star-Telegram:

So far, less than 4 percent of the option and interest-only ARMs are delinquent, well below the 14 percent rate for the subprime market, where about $1.5 trillion in home loans are still outstanding, according to data from the research firm First American LoanPerformance.

But many industry observers suspect that the biggest problems will emerge during the next 16 months as shoddily underwritten ARMs made near the real estate market's peak in 2005 and 2006 climb to higher interest rates.

The Mortgage Fondation pointed out that:

Last year, negative amortization loans accounted for 9.9 percent, or $350 billion, of all mortgages nationwide, up from just 0.4 percent as recently as 2003, according to LoanPerformance.

Thornberg said he believes that the mortgage market turmoil could lead to a recession. "This snowball is just 20 percent down the hill. It's nowhere near the bottom," he said.

The problems are not just with Adjustable-Rate Mortgages (ARM's.)Mortgage companies have also been issuing what were called "no documentation" Mortgages, those issued based on nothing more than the customer's assertion that they had a job, a given income and certain assets.

So why were these problems not stopped sooner when the damage to the American economy and the world credit markets would have been a lot less? Simple. The damage to Bush's reelection hopes in 2004 would have been tremendous.

This all goes back to the economic problems that George Bush had prior to his reelection in 2004. The Federal Reserve Chief, Alan Greenspan, told the Credit Union National Association meeting in a well publicized speech given in February 2004:

Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

He knew what he was proposing would lead to a lot of foreclosures and personal financial tragedies when the housing bubble finally burst, but the important thing was that Bush be reelected. Credit standards and verifying documentation went out the window. He was pumping up the housing market in 2004 before the election.

In February 2005, after Bush was safely reelected, Greenspan started to slowly increase the interest rates. The effect was to stop the increased prices of homes, but it was too late. The damage was done, and to avoid the inevitable credit crunch the poor underwriting standards and risky loans were continued.

Why not? The mortgage brokers made their money up front. Any sale was a profit, and the loan was sold to a lender. Also, people do not shop for mortgages. They buy a house. The mortgage is a very complex technical document and if the mortgage broker starts to explain the real risks, the customers quickly go to someone else who assures them the loan is safe. Since both the realtor and the mortgage broker get paid only one sale of the home, any conscientious mortgage broker will quickly find no Realtors bringing him customers. The result is that most people who bought such loans did not realize the risk they were taking (nor did they know they were taking it to reelect Bush in 2004.)

The housing bubble started during the dot com boom days, but when Bush was first elected appointed President, the economy was already beginning to turn down. He couldn't afford that, so he and Greenspan did not shut down the more risky housing loans which were the only major prop under the economy.

I'm sure Greenspan thought they could get the problems under control soon, but the ignored problems quickly passed into the lead-up to the 2004 election. Every President in the twentieth century who ran for reelection in a period of economic downturn lost. Rove knows that. So the government let the rotten credit conditions run until after the election.

The increased interest rate was certain to cause foreclosures, but real estate downturns take a long time to work themselves out. This one started in 2005 when the Fed started tightening the interest rates and is only now becoming really bad. There was no effort to rein in the extremely loose credit standards because that would have just made the problem worse, and I am sure Greenspan hoped the bad results of the housing bubble collapse would work themselves out relatively mildly. Obviously it hasn't happened that way.

It's not any surprise (in hindsight) that the problems have spread outside the subprime mortgage market. The entire mortgage market has been used since 2001 to prop up the largest economy in the world while the government was mismanaging taxing and spending to a degree never before seen.

The surprise is that the shaky system could have been misused by Bush and Greenspan for so long. But for all that the economists think they know, they will freely admit that the timing of macroeconomic changes is not part of it. The Fed knew that increasing the interest rate would stop the housing bubble, and that there would be associated negative results. That's why they didn't try until 2005. They didn't know how extensive the problems would be, nor how long they would take to appear.

Nor did they know, or care, how many homeowners would suffer. Why should they? They are Republicans, after all. It's all just politics to Republicans, and the wealthy aren't being hurt by this. Just the rest of us peons.