Why sub-primes are the tip of the iceberg

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If you only have time to read one piece of commentary on the sub-prime rate freeze, I recommend this one. It quotes a mortgage industry insider who explains that sub-prime mortgages represent a very small subset of the doomed mortgages that are now slouching toward default. It speaks directly to the California problem no one wants to face right now: many of the higher-income buyers who bought $1 million homes in the past couple of years with ‘prime’ or ‘Alt-A’ mortgages cannot afford to continue paying those mortgages.

Highlights of the insights of Mark Hanson, as quoted by Herb Greenberg of Marketwatch:

‘Sub-primes aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMs, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come.’

So what’s happening in northern California right now? ‘.. in a nutshell we have 90% fewer qualified buyers for five times the number of homes. To get housing moving again in Northern California, either all the exotic [mortgage] programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.’

I recommend you read the whole piece. Among other things, it is a reminder that government officials have yet to talk honestly about the size of the mortgage problem. This is not a sub-prime problem. It’s a mortgage problem. Bad loans were written in every possible category to every possible kind of borrower.

Thoughts? Comments? Insights? E-mail story tips to peter.viles@latimes.com
Hat tip: Patrick.net, via Brett, via e-mail, and many others.