January 28, 2008
Subprime Woes Overstated . . . or Worse?
Alan Reynolds of the Cato institute claims that misinformation from the media related to the subprime mortgage market has been propagated in part by the Center for Responsible Lending (CRL). Further, it is alleged that a crafty investor is channeling funds to the CRL and is profiting from the alarmism through the shorting of mortgage-backed securities. Such are the implications in an entry by Chris Edwards on the Cato @ Liberty blog:
Alan notes that there is a lot of misinformation out in the media about mortgages, much of it coming from the Center for Responsible Lending which, in turn, received a lot of cash from John Paulson who just made $3-4 billion by shorting mortgage-backed securities during the panic and hype about “subprime.”
Nothing like good conspiracies.
A quick look at the Center for Responsible Lending's website confirms at least the alarmism. The headline Sunday night read The Subprime Disaster Gets Even Worse. There is a call for Congressional action to "stop foreclosures and prevent more reckless lending". They predict millions will be losing their homes due to the real estate market crash. There is little question that this interest group is at the very least positioning itself to take advantage of the perceived crisis.
So what are the facts? Reynolds notes the following:
- Most foreclosures are prime, not subprime.
- Half of subprime mortgages are fixed, not ARMs.
- The vast majority of recent subprime loans were for refinancing, not buying. As house appraisals went up, some just borrowed all the phantom equity and spent it.
- About 96% of all mortgages are paid on time. Most of the rest are late, but not in default.
- The main reason for default is that home prices fell in some areas, leaving more owed on the mortgage than the house is worth.
- Serious delinquency (2-3 months late in payments) is much more common than foreclosure, partly because deals are being renegotiated. The media often confuse numbers of late payers with numbers of actual defaults.
- Most foreclosures of ARMs happened before the rate adjusted, not after. Often within one year. This was often due to borrower fraud — lying about income and assets. When the house or condo could not be quickly flipped at a profit, those with zero down just stopped paying.
- Very few subprime borrowers qualified for the lowest teaser rates — most paid about 7% or so from the start, so far as [he] can tell.
- The adjustments on ARMs are limited, and with rates now falling some adjustment will be down rather than up.
The sentiment that all is not as bad as it seems is shared by Stefan Swanepoel, Chairman and CEO of RealtyU Group, Inc. He wrote an article on his site Retrends.com titled Mortgage Market Mayhem, sharing Reynolds view that the media is overstating the effects of the subprime market on the economy. Swanepoel believes most of the mortgage businesses that went bust shouldn't have been in the business in the first place (I recall similar reaction to the tech bust in 2000). He notes that there were several pre-warnings that the market was due for a correction and that the poorly run businesses failed to account for a shifting market. Though the real estate market was due for a correction, Swanepoel writes, "the market creates numerous opportunities to grow a business and gain market share. As with any trend or change, knowledge is the key and being pre-warned is also strategically smart." This applies not only to real estate markets but to legal markets as well.
I am of the opinion that it is too early to accurately predict the effects of the subprime market "correction". Volatility in markets make for bad prognosticating. Whether or not millions will be losing their homes this year is yet to be seen, but we should expect that there will be effects on the real estate market and home values in many areas. Whether we are in for several tough financial years or just a bump in the road, take the time to research and learn of emerging trends and warnings (from several sources, not just the main stream media) in industries that your firm services. Position your firm as ready to serve the needs of clients during changes in the political and economic landscape.
Not to the extent alleged of Paulson, of course.
Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:
877/377-3740, e-mail info@juris.com or go to www.Juris.com.
Leave a Comment