Housing.com News, Analysis & Opinion: Mortgage & Loan: The Subprime Contagion Spreads

I've documented at length over the last two years as to why is this happening, but one question that hasn't gotten asked is what will happen next? Specifically, why did these huge, risk-averse banks take such a huge gamble on risky loans, and what will happen now that the entire market is crashing?

Sunday's NYT has a great look at how and why the pigs came to slop at the trough:

Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices...Wall Street, of course, was happy to help refashion mortgages from arcane and illiquid securities into ubiquitous and frequently traded ones. Its reward is that it now dominates the market. While commercial banks and savings banks had long been the biggest lenders to home buyers, by 2006, Wall Street had a commanding share — 60 percent — of the mortgage financing market, Federal Reserve data show...The issuance of mortgage-related securities, which include those backed by home-equity loans, peaked in 2003 at more than $3 trillion, according to data from the Bond Market Association. Last year’s issuance, reflecting a slowdown in home price appreciation, was $1.93 trillion, a slight decline from 2005.

I strongly urge you to read the entire article. Wall Street has built itself a fragile house of cards based on dubious monetizing of shady loans (and loan practices), and the end result will be the tightening of credit to such a degree that only the richest will be able to afford homes, mountains of unsold inventory, and a moribund economy overall.

You (quite literally) heard it here first. The contagion will claim many more before it runs its course, and there's no cure is sight.

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What was once considered "irresponsible speculation" on the part of certain wild-eyed bloggers is now literally making headlines across the country. Just take a look at what's on the front pages of the newspapers and Web sites today: The New York Times: More Homeowners Unable To Make Payments. USA Today: Subprime mortgages lift late payments; foreclosures hit record. Yahoo News: Late mortgage payments reach high. I've documented at length over the last two years as to why is this happening, but one question that hasn't gotten asked is what will happen next? Specifically, why did these huge, risk-averse banks take such a huge gamble on risky loans, and what will happen now that the entire market is crashing? Sunday's NYT has a great look at how and why the pigs came to slop at the trough: Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices...Wall Street, of course, was happy to help refashion mortgages from arcane and illiquid securities into ubiquitous and frequently traded ones. Its reward is that it now dominates the market. While commercial banks and savings banks had long been the biggest lenders to home buyers, by 2006, Wall Street had a commanding share — 60 percent — of the mortgage financing market, Federal Reserve data show...The issuance of mortgage-related securities, which include those backed by home-equity loans, peaked in 2003 at more than $3 trillion, according to data from the Bond Market Association. Last year’s issuance, reflecting a slowdown in home price appreciation, was $1.93 trillion, a slight decline from 2005. I strongly urge you to read the entire article. Wall Street has built itself a fragile house of cards based on dubious monetizing of shady loans (and loan practices), and the end result will be the tightening of credit to such a degree that only the richest will be able to afford homes, mountains of unsold inventory, and a moribund economy overall. You (quite literally) heard it here first. The contagion will claim many more before it runs its course, and there's no cure is sight.