Busted: Bankers and The Global Economy

August 12, 2008

U.S. Mortgage Defaults Spike

For some the United States has been dealing with high default rates in subprime and alt-a loan configurations. Now the U.S. economy and banking community has something to really fear with the increase of defaults in “prime” mortgages. There is an interesting wrinkle here.

The problem with prime mortgages is showing out in style for loans made in 2007. The default rate on 2007 prime mortgages is three times higher than loans made in 2006. This potentially dashes any hope that bankers had for prime mortgages as a stabilizing force to pull the economy out of the doldrums.

What is the cause for increasing prime mortgage failures? Did bankers hastily rush loans through in an effort to promote and heighten their own mortgage incomes? Could it be that many more 2007 home buyers were first time buyers or not as financially well-heeled, facing economic fallout from a faltering U.S. economy. In the next few weeks, better determinations are certain to be discovered.

Right now, the appearance is that increased defaults are simply a symptom of a greater economic malaise that is making inroads into an increasing number of households across the board. Bankers are now increasingly fearful of a long dark period of declining housing numbers, further threatening the banking and mortgage recovery and the recovery of the nation as a whole.

We’ve known for some time that the housing market has been ripe for a major adjustment. The continuing increase in mortgage default rates coupled with the downward U.S. economic spiral could see a much greater decline in home prices than has generally been considered. The rosy real estate projections that “anytime is a great time to buy a home” has likely been proved wrong, since declining house prices are a bust to the mortgage credit market.

Initially, the greater problem for the market is the decline in housing prices until they are low enough for buyers to become interested in buying again. How long that will take is anyone’s guess. With a contracting market, getting an affordable loan to buy a new home is becoming more and more difficult, putting increasing downward pressure on the market as a whole in a kind of self-fulfilling vicious cycle. The cycle will ultimately end, but planning for the economic carnage ahead remains the largest issue in the United States economy.

Many Americans have sold themselves into slavery to get a home that they hoped that they could afford. Bankers have sold themselves into slavery to their own devices, always hoping for a quick way out to make another quick buck. Nobody loves economic pain, but pain is the only way to grow past our collective economic ignorance. In many ways, both bankers and home buyers have reaped what they have sown, sometimes in the Biblical sense. Learning the lesson that life teaches will enrich America if the nation takes the lesson to heart. The Federal Reserve has not been quick to chastise bankers for a lack of financial literacy as the pseudo-governmental body seeks a collective middle ground. That is about to change. ~ E. Manning

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