Subprime meltdown is the begining of the End of the Bull

In the end of the Housing bull market you could apply for loan and get it without any proper credit check, with your income sufficient enough only to repay interest, and without any down payment. "Mortgages requiring little or no documentation became known colloquially as “liar loans.” An April 2006 report by the Mortgage Asset Research Institute, a consulting concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half." Once market moved into the bear territory value of the loan is higher then value of the house - you are in negative equity. You do not have money any more to pay interest because it has risen with Fed hikes, you will not be able to return loan and house will go in foreclosure with 20-30% discount even to recent market value. It is only on the margins of economy? I am afraid not so. Just look at GM, I thought they were supposed to compete with Nissan and Toyota. The biggest problem is that Marginal Bank repackaged all those mortgages to another banks in a way of Bonds sold with New High rating but with the same Junk underlying. The chain was going up in perceived quality of Bonds with increasing Rank of Latest Bank, when the house of cards will fall down all these A ratings will be worth less then paper to print them. Goldman, Merrill Almost `Junk,' Their Own Traders Say

How big is disaster? "Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market." All that excess liquidity from reinflation of economy out of recession in 2002 and which was driving Recent Bull market in equities found its way into the broadest available market - housing, unsustainable bubble was created and inflation spiraled out of control. Tightening in the way of increasing Fed rates brought first "marginal" borrowers to their knees, foreclosures and first losses will bring further tightening in the form of "restoration" of credit quality: loans will become less available, demand for housing will go down further, prices will collapse and consumer will stop drive economy without home ATM machine. Economy is in recession. Markets are plunging, rates are cut, negative rates pushing USD downwards and driving commodities, gold and silver bull markets.

"Late payments swelled to around 12.6% last autumn, according to Morgan Stanley, up from about 7% at the end of 2003.

General Motors, the world's biggest carmaker, may have to take a charge of almost $1 billion to cover the bad mortgage loans of its subsidiary, Residential Capital, says Lehman Brothers. HSBC, Europe's biggest bank, saw its bad-debt costs soar by 36% to over $10 billion in 2006 because of sloppy lending. Its chief executive, trying to reassure investors, said: “This is not trailer-park lending...this is Main Street America.”

Subprime mortgage loans made up over a fifth of all originations last year, according to Inside Mortgage Finance, a newsletter, up from 6% in 2002 (see chart).

They lowered underwriting standards and offered a bevy of “affordability” products like extra-long-term or “interest-only” mortgages (in which principal payments are deferred for a time) and loans with low teaser interest rates, known as hybrid mortgages, that balloon after a few years.

The “FICO” credit scores on which mortgage lending often relies did not capture this risk layering. Scores were probably inflated. David Hendler of CreditSights, a research firm, says around 40% of a FICO score is based on repayment history—but these records were “artificially rosy” because of the recent housing boom.

The effects of a dramatic slowdown, or credit crunch, in the subprime and the Alt A market could spread. The stock of unsold homes would remain unsold longer, crimping house prices. Consumer spending might slow. Investors might shy away from securities backed by prime mortgages and other assets, not just subprime ones, pulling liquidity out of the market. "

"Subprime lending
Rising damp
Mar 8th 2007From The Economist print edition

http://www.economist.com/finance/displaystory.cfm?story_id=8829612