The Subprime Meltdown Has Already Begun?

One of the new memes in the media is that this subprime meltdown we all see happening before our eyes is that it’s because of adjustable rate mortgages. They’re all to blame as people who were comfortably able to afford their spacious homes until their rates went up because the economy is tanking, George W. Bush eats puppies in gravy, and the evil white bankers are trying to shaft the little guy.

You’ve heard it all.

Nestled in a desperate story about all these poor homeowners that we’re meant to feel sorry for is an interesting statistic, though…

Many subprime loans are adjustable rate mortgages, meaning their interest rates jump after an introductory period. Borrowers who had not fallen behind on their payments before their rates reset can benefit from a simple freeze of their rates. Many subprime borrowers took out loans they could not really afford – making workouts more complicated.

The report showed that 28.5% of subprime adjustable rate mortgages that won’t reset until spring 2009 are already delinquent. About 21% of these same loans were delinquent in October.

Interesting. They haven’t reset yet, and yet already the people who are holding the loans can’t afford them (as evidenced by their inability to pay them back).

Now we can go back and forth all day about who’s responsible for this mess. We can blame predatory lenders who ignored someone’s inability to pay a mortage because they knew they’d end up selling it within 12 months anyway. Or, if we’re so inclined, we can blame the buyers who, while making very little, got way in over their heads because they didn’t think out the costs properly.

Whatever the case, it’s clear that this isn’t only about the banks adjusting rates and kicking people out with massive rate hikes. That’s obviously a real problem, and one we’ll have to see dealt with, but it’s pretty obvious from the above-linked story that there’s way more to this story than we’re getting.

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  • Patrick

    What most of the media is neglecting to mention is that this is only one symptom of a broader financial crisis. From what I’ve read (many of the leading economists support this idea), we can expect to see disasters linked to credit cards, personal lines of credit, student loans, and, because many of the businesses in these sectors are insured, the insurance companies should suffer severe setbacks. What kind of effect will this have on conspicuous consumption…? And the cycle continues…

    From what I understand, it’s not just the lenders and the borrowers who are at fault; it’s the executives of major financial institutions who wage irresponsible investments and provide overoptimistic earning statements.

    Not to mention that, in real terms, the state of the economy, as it is provided by the federal government, is premised on fudged numbers. Since the 1960′s, subsequent administrations have been successful at excluding factors from unemployment, inflation, and GDP reports that might prove to be politically damaging. It’s probably much worse than we realize, yet, still, the idiot said yesterday that this is “just a slow down, not a recession.”

    We need some huge economic revisions from our next president.

  • Patrick

    What most of the media is neglecting to mention is that this is only one symptom of a broader financial crisis. From what I’ve read (many of the leading economists support this idea), we can expect to see disasters linked to credit cards, personal lines of credit, student loans, and, because many of the businesses in these sectors are insured, the insurance companies should suffer severe setbacks. What kind of effect will this have on conspicuous consumption…? And the cycle continues…

    From what I understand, it’s not just the lenders and the borrowers who are at fault; it’s the executives of major financial institutions who wage irresponsible investments and provide overoptimistic earning statements.

    Not to mention that, in real terms, the state of the economy, as it is provided by the federal government, is premised on fudged numbers. Since the 1960′s, subsequent administrations have been successful at excluding factors from unemployment, inflation, and GDP reports that might prove to be politically damaging. It’s probably much worse than we realize, yet, still, the idiot said yesterday that this is “just a slow down, not a recession.”

    We need some huge economic revisions from our next president.

  • http://www.insignificantthoughts.com/ Vinny

    In fairness, you can’t know you’re in a recession until the economy starts moving downward, and right now it’s not moving anywhere but up (albeit at a very slow growth rate).

    The takeaway question, though, is is this really a financial crisis that can be solved with regulation, and at what point are people expected to only borrow what they can afford to pay back?

    Something bad is going on, but I’m not sure you can regulate predatory lending without taking away some of the wiggle room that gets borderline people a home. Not every borderline borrower ends up in foreclosure.

  • http://www.insignificantthoughts.com Vinny

    In fairness, you can’t know you’re in a recession until the economy starts moving downward, and right now it’s not moving anywhere but up (albeit at a very slow growth rate).

    The takeaway question, though, is is this really a financial crisis that can be solved with regulation, and at what point are people expected to only borrow what they can afford to pay back?

    Something bad is going on, but I’m not sure you can regulate predatory lending without taking away some of the wiggle room that gets borderline people a home. Not every borderline borrower ends up in foreclosure.

  • Patrick

    Yes, and technically, he was right. But most signs point toward a recession and, perhaps, a depression. And that’s characteristic of this president; ignore the advice of experts and pretend we are living out a fairy tale…

    Anyway…

    That is the significant question. I think you’re correct. At some point, though, opponents of regulation need to realize that unregulated markets cause economic crises. Then, when those crises occur, the government is sometimes forced to nationalize businesses to prevent economic collapse -and nobody wants that. It happened recently in the banking sector in the UK and we came close to seeing it with Bear Stearns.

    Regulation? Deffinately, but how much? I don’t think that tax cuts are the answer, although they will invariably be discussed during the general election. I can’t imagine that the rebates we will be receiving will be anything more than a band-aid solution. To me, this is why NOT electing John McCain is so vital.

  • Patrick

    Yes, and technically, he was right. But most signs point toward a recession and, perhaps, a depression. And that’s characteristic of this president; ignore the advice of experts and pretend we are living out a fairy tale…

    Anyway…

    That is the significant question. I think you’re correct. At some point, though, opponents of regulation need to realize that unregulated markets cause economic crises. Then, when those crises occur, the government is sometimes forced to nationalize businesses to prevent economic collapse -and nobody wants that. It happened recently in the banking sector in the UK and we came close to seeing it with Bear Stearns.

    Regulation? Deffinately, but how much? I don’t think that tax cuts are the answer, although they will invariably be discussed during the general election. I can’t imagine that the rebates we will be receiving will be anything more than a band-aid solution. To me, this is why NOT electing John McCain is so vital.

  • The Masked Rye

    Rebate checks are like bonus money… you don’t spend it on bills. Most american’s I’m sure will spend it on frivolity of some sort. Hell, that’s why most of them (ok, me as well) are in debt.

    I’m just sayin… I’ll take the rebate checks, but it won’t go to paying down my mortgage. Ok, that’s not true, I’m trying to be more responsible with one kid and another on the way. I will pay down debt, or save it, but I know me from 3 years ago would have bought a gadget or a guitar or recording time. If you win a grand at the track*, it’s “mad money”. It just burns a hole in your pocket.

    Anyway, at the moment, with all that’s going on with my life, my mortgage, daycare, new baby, increased assesment of my house, etc., I’m just tryin’ to make ends meet and put a little bit away for the kids… and I’m just hoping someone comes along to fix this situation if that’s even possible. I’m not one to usually blindly hope for something, but hey, I’m too busy working two jobs, making what should be decent money, and I’m still floundering. Maybe if it didn’t cost me over $50 at the tank and if my heating bills and grocery store bills hadn’t gone waaaaay up, I’d be fine. -sigh- it’s probably my penchant for high priced hookers.**

    *I’ve never been to ‘the track’, nor have I ever won a grand. It just seemed like a good analogy, and I felt cool writing it.

    **This statement is untrue. I do not have a penchant for high priced hookers. Ok, I can’t lie… I do have a penchant for high priced hookers, I just can’t afford them.

  • The Masked Rye

    Rebate checks are like bonus money… you don’t spend it on bills. Most american’s I’m sure will spend it on frivolity of some sort. Hell, that’s why most of them (ok, me as well) are in debt.

    I’m just sayin… I’ll take the rebate checks, but it won’t go to paying down my mortgage. Ok, that’s not true, I’m trying to be more responsible with one kid and another on the way. I will pay down debt, or save it, but I know me from 3 years ago would have bought a gadget or a guitar or recording time. If you win a grand at the track*, it’s “mad money”. It just burns a hole in your pocket.

    Anyway, at the moment, with all that’s going on with my life, my mortgage, daycare, new baby, increased assesment of my house, etc., I’m just tryin’ to make ends meet and put a little bit away for the kids… and I’m just hoping someone comes along to fix this situation if that’s even possible. I’m not one to usually blindly hope for something, but hey, I’m too busy working two jobs, making what should be decent money, and I’m still floundering. Maybe if it didn’t cost me over $50 at the tank and if my heating bills and grocery store bills hadn’t gone waaaaay up, I’d be fine. -sigh- it’s probably my penchant for high priced hookers.**

    *I’ve never been to ‘the track’, nor have I ever won a grand. It just seemed like a good analogy, and I felt cool writing it.

    **This statement is untrue. I do not have a penchant for high priced hookers. Ok, I can’t lie… I do have a penchant for high priced hookers, I just can’t afford them.

  • http://www.insignificantthoughts.com/ Vinny

    I bought a Kindle with mine. I couldn’t resist and I absolutely LOVE it.

  • http://www.insignificantthoughts.com Vinny

    I bought a Kindle with mine. I couldn’t resist and I absolutely LOVE it.

  • Patrick

    Yeah, I’d like to do my patriotic duty and just blow it, but I have to throw a bunch of money at my school so they will stop with the irritating e-mails and letters. I will, however, use a portion of it to go out and get completely fucking drunk -should help me cope…

  • Patrick

    Yeah, I’d like to do my patriotic duty and just blow it, but I have to throw a bunch of money at my school so they will stop with the irritating e-mails and letters. I will, however, use a portion of it to go out and get completely fucking drunk -should help me cope…