A “classic double bubble”

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Good morning. Repeat after me: It’s not just a sub-prime mortgage crisis, it’s a mortgage crisis. Or, as PIMCO’s Paul McCulley writes, it’s a ‘classic double bubble’ -- one bubble is the asset, the other bubble is the lending against that asset.

One bubble is housing, the other is mortgage lending. Not just sub-prime lending. All of it.

If you don’t believe me, read E. Scott Reckard’s piece in today’s L.A. Times about growing troubles with Option ARMs.

Option ARMs, Reckard writes, ‘were the easiest and most profitable home loans for lenders and brokers to make for much of this decade.’

Why did borrowers like them? Simple: Option ARMs allow you to buy maximum house for minimum initial monthly payment. They are not particularly complicated or confusing. You buy now and pay later.

‘... more than 75% of option ARM borrowers have been making only the minimum payments, analysts at Standard & Poor’s Corp. said last week. As a result, the delinquency rate on option ARMs already is jumping and is likely to keep rising sharply, S&P said.’

Why was there a bubble in mortgage lending? Because mortgage lending, particularly products like option ARMs, was wildly, shockingly profitable. According to John Diamond, a Chino broker, while a broker might earn $4,500 for selling a $300,000 fixed-rate loan, the commission could total $12,000 on an option ARM of the same size. ‘These loans drove the whole industry from late 1999 through late 2006,’ Diamond said. ‘It was just about the only thing any broker wanted to sell.’

Don’t blame just the brokers. Borrowers wanted these things.

Your thoughts? Comments? Insights? E-mail story tips to peter.viles@latimes.com.