By Terry Keenan
Confused about what the sub-prime mortgage meltdown means for the economy and your money?
Well first, let's call a spade a spade. These risky mortgages aren't really so complex or exotic —they're junk mortgages, plain and simple. Sub-prime is just a euphemism bankers have whipped up to disguise their risk.
It's been a familiar theme in the last few years, as other Wall Street word-meisters have taken to re-labeling risk as well. Leveraged buy-out firms are now called "private equity" shops, junk bonds now are "high yield," and hedge funds are supposedly, well ... hedged. It's a far cry from 20 years ago, when Drexel Burnham was firing up its junk bond machine.
Back then, CNN founder Ted Turner had no problem boasting that junk bonds were for "people who couldn't borrow from the bank." He was right. And while Turner Broadcasting survived, Drexel and hundreds of other high-yield borrowers didn't. The fallout helped to exacerbate the Savings and Loan crisis, the real estate bust of the early 90s, and the recession of 1991-92. But at least investors were warned of the risk — the bonds belonged in the junkyard when it came to credit quality.
Not so this time around. Although the housing bears have been warning the risky features of mortgage lending in recent years, those cautious few were laughed off. Few really talked about just how "sub" the sub-prime borrower really was.
Well, now we know. Not only were millions able to borrow with no money down, no proof of income, not even proof of legal status, the Mortgage Bankers Association now says nearly 14 percent of those junky borrowers were delinquent on their mortgage payments at the end of 2006 — even with the economy at near full employment.
Now that it's all over, except the crying, Washington is wading into the mess. With estimates floating around this week that 2.2 million Americans may lose their homes to foreclosure, Democrats are calling for hearings into so-called "predatory" lending practices. Yes, the very same lawmakers who turned a blind's eye to years of lax lending in their own backyard (at Fannie Mae and Freddie Mac) now want to turn millions of Americans into victims of the housing boom they championed.
It's going to get messy, and that's why investors are frightened, and rightly so. As in the wake of other financial crises such as Enron, Orange County and Long Term Capital, the Fed, lawmakers and lenders are cracking now that the game has come to an end. Where were they to protect unqualified borrowers a year or two ago, when the trashy mortgage party was just kicking off?
What the market is saying is that the hangover is here and it's going to be a doozy. Mortgages will be far harder to come by, down payments will go way up, home prices will continue to go down, and the money machine that was the $6.5 trillion mortgage industry will grind to a halt. That will hit the brokerage stocks, the banks, the homebuilders and the housing products stocks right in the bottom-line.
And with those companies making up more than 30 percent of the value of the S&P 500, there's likely more fallout to come.
Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!
Sub-prime mortgage market -Some facts and data
Fri, 16 Mar 2007 15:26:09 GMTby Peter Possing Andersen
Danske Bank A/S
The sub-prime mortgage market
The sub-prime market is the part of the mortgage market devoted to borrowers with a less than perfect or bad credit record.
According to the latest MBA (Mortgage Bankers Association) figures the sub-prime sector makes up13.7% of the total mortgage market.
Sub-prime borrowers face higher costs due to their lower credit standards and higher risk of delinquency.
The sub-prime market covers the same spectre of available loan types as the prime market: adjustable rate mortgages (ARM), fixed rate mortgages (FRM) etc.
The structure of the US mortgage market
Sub-prime as a share of total mortgages.
Delinquencies and foreclosures -all mortgage loans
Tighter mortgage credit standards
No signs of distress in broad credit measures.
Consumer balance sheets remain healthy
What are the concerns?
A bust in the sub-prime market impacting the financial sector negatively
Households with loans in the sub-prime market cutting back consumption due to credit distress
Prime lending standards tightening and feeding negatively into a broad consumer slowdown
Is this the first sign of liquidity drying out?
Our take on the macroeconomic impacts #1
No doubt that the problems in the sub-prime market are serious.
The sub-prime jitters could be an early warning of more widespread trouble in the credit market, with negative macroeconomic consequences.
While signs of such developments should be watched closely, we expect the problems to remain contained within the sub-prime sector.
At present there are no signs of distress in neither the prime mortgage market or other segments of the consumer credit markets.
Our take on the macroeconomic impacts #2
With the economy remaining sound outside the housing market (i.e. healthy household and corporate balance sheets, continued job growth and high income growth) the conditions for a credit crunch are not present.
Moreover, we do not expect a major outright drop in house prices. That said, mortgage credit standards are likely to be tightened further going forward.
However, given the present situation we do not expect aggregate consumer spending to enjoy any major spill-over from the crisis in the sub-prime mortgage sector.
As a whole we expect no large ramifications on the macro economy from the sub-prime crisis.
Download full Sub-prime mortgage market with charts