In these Times, July 17, 2007 Tranche Warfare Who will be left holding the bag as subprime mortgages go bad? By Dave Mulcahey
Now that the real estate bubble seems poised to go the way of its dot-com predecessor, a new narrative has taken hold in the business press. Where once reporters breathlessly touted double-digit, year-on-year gains in home prices, they now warn darkly of the "meltdown" underway in the class of exotic mortgages that added so much punch to the party. After months of dismal reports for the real estate industry--declining sales, rising inventories, softening prices, rising foreclosure rates--the news took a sharp turn for the worse in late June, when the investment bank Bear Stearns shut down two hedge funds whose holdings were laden with securities backed by subprime mortgages. Suddenly, finance pundits and insiders were speculating about just how far the damage of bad subprime loans would spread. Could it be "contained"? Were more hedge funds on the verge of implosion? Was the debacle about to touch off a system-wide credit crunch? Meanwhile, a bemused public was wondering what the rarefied world of hedge funds had to do a bunch of poor suckers who had bought more house than they could afford. How many of these loans could there be--and how many defaults--that a Wall Street powerhouse like Bear Stearns was taking it on the chops? And what's the story behind all these subprime loans, anyway? Whose idea was all that funky lending? The insiders' questions have yet to be answered. But for financial naifs, the Bear Stearns imbroglio was highly instructive. It briefly pulled back the curtain to reveal the machinations behind the mountain of mortgage debt the American peasantry has piled up during the great housing bubble. Subprime lending in the United States rose from $35 billion annually in 1994 to $625 billion in 2005. A shocking proportion of this financing was extended on the flimsiest pretenses of due diligence by lenders, and carried terms and conditions sure to ruin a large number of borrowers. According to Fannie Mae, between $1.1 and $2.2 trillion in adjustable-rate mortgages will reset to higher rates in 2007. Another $1.4 to $2.4 trillion will reset in 2008--half of it subprime and another quarter less than prime. It's difficult to see how that will end well. Yet for a while, the bubble seemed like some millennial, never-ending win-win scenario. full: http://www.inthesetimes.com/main/article/3275/
