From the New York Post:
HOLD ON TIGHT – THE JUNK-LOAN FALLOUT’S JUST BEGINNING
CONFUSED about what the subprime 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. Subprime is just a euphemism bankers 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 buyout firms are now called “private equity” shops, and junk bonds now are “high yield.” 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 exacerbated the savings-and-loan crisis, the real estate bust of the early ’90’s and the recession of 1991-’92. But at least investors then were clearly 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 of the risky features of mortgage lending in recent years, the cautious were laughed off. Few really talked about just how “sub” the subprime 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.
It could 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, as well as lawmakers and lenders, is cracking down now that the game has come to an end. Where were they in 2003, 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 come down, and the money machine that was the $6.5 trillion mortgage industry will grind to a halt.