People who've been reading Bonddad on Kos here and other blogs such as The Big Picture or Calculated Risk know the story: the subprime mortgage market is getting horrible, as in the financial equivalent of a hurricane Katrina.
The NYT has new details.
And it should scare a bejesus or two out of you...
The rapid rise in the amount borrowed against a property’s value shows how willing lenders were to stretch. In 2000, according to Banc of America Securities, the average loan to a subprime lender was 48 percent of the value of the underlying property. By 2006, that figure reached 82 percent.
Mortgages requiring little or no documentation became known colloquially as "liar loans." An April 2006 report by the Mortgage Asset Research Institute, a consulting concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half.
If you check the stock research websites, firms like Bear Stearns, Merrill Lynch, Morgan Stanley, Deutsche Bank and UBS all have low P/Es. But these firms themselves are deeply involved in the sub-prime market.
And if there's a ripple effect...
Even now there are companies not showing these bad loans as bad loans...
Still, the rating agencies have yet to downgrade large numbers of mortgage securities to reflect the market turmoil. Standard & Poor’s has put 2 percent of the subprime loans it rates on watch for a downgrade, and Moody’s said it has downgraded 1 percent to 2 percent of such mortgages that were issued in 2005 and 2006.
Yes, despite the fact that all those people lied on "liar loans," everything's still hunky dory with the ratings agencies.
Read the article. Then remember this quote by the "maestro," Alan Greenspan, whose conducting skills for creating bubbles would have put Lawrence Welk to shame:
"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . .
Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers."