U.S. Mortgage Market in Crisis Due to Failure of Subprime Lenders

After the market correction two weeks ago, we expected some hot action in the financial markets.

Instead, investors – who had been shaken out of their torpor by plunging stock prices worldwide – hit the snooze button again, rolled over, and went back into dreamland.

And why not? The news at the end of the week was soothing enough. Employment was up. Payrolls were up. A report from the United States Federal Reserve said that the trade deficit was supposed to have narrowed in January.

The Dow lifted slightly. Gold held over USD $650. The US dollar stayed about where it was and where it has been for a long, long time – at USD $1.31 per euro.

And so another week ticked by… the United States National Debt crowded up against the USD $9 trillion mark… and approximately another USD $2 billion of U.S. assets slipped into foreign hands.

As to the former number, we were tempted to put a capital T on the trillion but decided against it. It needs no additional emphasis. The biggest pile of money ever put together in the history of the planet is now owned by people who call themselves communists. It is just a little more than USD $1 trillion – most of it in the form of claims against U.S. assets (dollars). But the U.S. federal government owes nine times that amount, about half to the public… of which more than half the owners are foreigners.

The interest on the amount held by the public alone comes to USD $240 billion per year – or 11% of tax receipts. It is expected to double in the next ten years… in 33 years it would take 100% of the entire federal budget. Obviously, that can’t happen. The U.S. government would be out of business.

Instead, something’s gotta give.

But even though something’s gotta give, it doesn’t mean that something’s gotta give right now… and it doesn’t mean that the majority of investors will not act like nothing’s ever gotta give… right up to moment when all hell breaks loose.

Take the U.S. mortgage market… please. Something had to give there too, but that didn’t prevent a lot of very smart people from lending money right up to the moment when they heard the subprime bumpers crunching up against the foreclosure concrete.

And even then… the experts rushed to tell us that the damage would be minor. We have our seat belts, our air-bags, they said – go back to sleep.

Less than two weeks ago, Scott Coren, an analyst with Bear Stearns, wrote clients that New Century Financial was not a bad buy at USD $15, since the lowest it could go was about USD $10 in “a rescue-sale scenario.”

But what’s this? The stock traded last week down to USD $3.21. When something finally did give at New Century, where were the rescuers?

The entire U.S. mortgage market is worth USD $6.5 trillion – more than the U.S. Treasury market. Something seems to be giving in spades, but where are the rescuers?

“Already, more than two dozen mortgage lenders have failed or closed their doors,” reports Gretchen Morgenson in the International Herald Tribune, “and shares of big companies in the mortgage industry have declined significantly. Delinquencies on loans made to less creditworthy borrowers – known as subprime mortgages – recently reached 12.6%. Some banks have reported rising problems among borrowers who were deemed more creditworthy as well.”

About a third of all mortgages written last year were ‘subprime‘ – a share that has tripled in the last three years.

When you make so many loans to so many people who can’t pay you back, something’s gotta give sooner or later. Now is as good a time as any.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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