More of what happens when you let Republicans run your country --Subprime woes to weigh down U.S. economy
Thu Mar 15, 2007 8:02AM EDT
By Joanne Morrison - Analysis
WASHINGTON (Reuters) - The quick collapse of the trillion dollar U.S. subprime mortgage market will drag out a housing market downturn and likely prolong weakness already evident in the world's richest economy.
The riskiest segment of the U.S. mortgage market, which serves borrowers with poor credit histories at high interest rates, has seen rising defaults amid stagnant or falling home prices and slower sales.
Subprime loans grew to 13.6 percent of the total mortgage market last year from 2.4 percent in 2000, according to the Mortgage Bankers Association. This mortgage sector helped poor credit consumers get into homes, but extended loans many borrowers are now finding they cannot afford.
Rising foreclosures could dump as much as a half a million more homes onto an already inventory-bloated housing market, analysts estimate.
"I think it's going to weigh heavily on housing and it will make 2007 a more difficult year for the economy as a whole," said Mark Zandi, chief economist of Moody's Economy.Com in West Chester, Pennsylvania.
These mortgages are typically adjustable. As the Federal Reserve pushed interest rates higher from June 2004 to June 2006, many buyers began to find themselves unable to make their higher payments.
In addition, many lenders over the past couple years extended loans with low teaser rates that are now beginning to reset at much higher levels, forcing some borrowers into foreclosure.
Some analysts say the Fed helped create a loose credit environment by holding interest rates at an unusually low level for a prolonged period in the wake of the 2001 recession.
"At some point excess liquidity and bubbles burst," said Kurt Karl, chief economist at Swiss Re in New York, who says the subprime segment of the market now faces a credit crunch.
More than 20 lenders have gone out of business as foreclosures and defaults have risen. Economists say this will extend the housing market decline into next year, cutting into economic growth.
And things could get worse.
"Up until about two to three weeks ago, I was fairly confident that the meltdown in the subprime market was going to be contained. However, I am beginning to grow more concerned that we may actually see some financial fallout that could slow economic growth," said Bernard Baumohl, managing director of the Economic Outlook Group in Princeton, New Jersey.
The economy grew at a tepid 2.2 percent annual rate in the final three months of last year, hit hard by the woes of the housing sector, which accounts for about 5 percent of gross domestic product. Economists are now expecting the economy to continue on this soft-growth path through the bulk of this year.
"The severity of the loss of economic activity remains to be seen," said John Lonski, chief economist at Moody's Investors Service in New York.
The distress in the subprime sector has hit stock markets around the globe hard. Lonski said how the U.S. stock market performs going forward would be critical since consumers -- whose spending fuels 70 percent of economic growth -- might grow nervous as they watch share prices decline.
"The fact that consumers are no longer going to be made wealthier by homeownership lessens the upside for consumer spending," Lonski said.
Consumer spending has already proven weaker in recent months than many economists had expected. In February, retail sales rose a slim 0.1 percent. While unusually cold weather could account for much of the weakness, some economists are worried the overall spending trend may be going soft.
The interest-rate resets many borrowers will soon face is also compounding the concern.
"My concern is now as mortgage rates are being reset, people are going to have to forego an additional $30 billion per year as a result of the reset on these mortgages," said Baumohl. "It's a significant increase for those who can't afford to pay the increase.
$10 TRILLION IN MORTGAGES
According to recent data from the Federal Reserve, the U.S. has $10 trillion in mortgages outstanding, a figure amounting to 75 percent of the size of the economy.
"Conditions are sure to erode significantly more throughout 2007 and well into 2008," warns Zandi, noting that the bulk of the subprime credit problems are concentrated in loans originated in 2005 and 2006, many of which will see interest-rate reset higher soon.
The risks do not only lie with borrowers and the firms that made the loans, because the bulk of these loans are securitized and held by investors in the so-called secondary market.
Already, about 4 percent of securitized subprime loans originated last year are delinquent.
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I seem to recall the Monkey taking credit for record numbers of people achieving home ownership... so he should take the blame for this. They sell that American Dream bullshit, and blather on about how great the economy is -- because it is, for them and their rich friends. They claim their greed and arrogance is good for the economy, when it only benefits them. People buy their bullshit, and unscrupulous weasels are right there to give them loans with ridiculous terms. But all people see is that carrot of owning their own home, and they sign on the dotted line. Then reality sets in, and people are screwed.Labels: Republicans are the source of all evil
posted by decemberx 9:35 AM[edit]
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