Every day it seems like we’re hearing more and more about how the whole subprime mortgage shakedown is affecting homeowners.  Loan defaults are skyrocketing.  Foreclosures seem to be closing in at a record pace.  Consumers are in panic.  But beyond these obvious outward signs of widespread housing market panic, the subprime woes are actually even bigger than they would appear – they’re wreaking some major havoc in the stock market.

Setting the Foundation for Trouble.

Let’s revert a bit to get a better grasp of the big picture.  Basically there are just a few basic things that set the pace for trouble in the first place.  They include:

• Consumers wanting to purchase more expensive homes on budgets already stretched thin.
• Borrowing money on terms that are only lucrative in the short run with little regard to the future.
• An ensuing housing bubble in many parts of the nation.
• The uptick in energy prices and other increased cost of living factors.

In other words, homebuyers over the last 5 plus years wanted to buy more home than they could conservatively afford.  The banks were willing to lend, after all that’s why they’re in business, right?  Buyers figured, well I can get by with my payments now and by the time the balloon is due or the APR increases, I’ll be in a better position to pay it or refinance anyway.  But reality struck and that didn’t idealism didn’t necessarily play out, forcing them into default on their loans.

Why Did Banks Make the Risky Loans?

The opportunity for profit was too good to pass up for most of the banks making subprime loans.  Although many of these loans were not sufficiently secured or guaranteed by any means, more risk does mean more lucrative interest rates and inflated rates equate to bigger profits.  Plus, most of the lending banks only planned to turn around and repackage the loans they wrote and sell them to investors who were more than willing to get their share of the pie.

The Subprime Mess Was Probably Predictable.

Possible Problems Rating the Securities.

It’s possible that part of the bigger issue is the fact that investors buying these repackaged loans weren’t aware of just how risky they really were.  Looking at the problem in depth, many believe that some of the big credit ratings agencies like Fitch Ratings, Standard & Poor’s Corp., and Moody’s Investors Service Inc. might not have lowered their ratings on these securities in time based on the increasingly risky loans that were being made to consumers.  However, it’s almost impossible to believe that these professional investment groups didn’t really appreciate the risk factors they were buying into.

Then the Meltdown Begins…

As the subprime loans that were most often adjustable rates began to reset upwards of 2% and more per year, consumers rapidly began to go into default.  Things snowballed.  More defaults mean more homes on the market.  Increased supply of homes means lower prices.  Lower prices mean more people owe more than their home is worth – continuing the meltdown cycle all over again.  Naturally, the problem took its toll on subprime lenders and Wall Street investors began to rapidly feel the same pain.

Just Where Do We Stand Now?

To date, some governmental relief for consumers caught in the trap has been initiated, but it’s all been minor in nature.  It doesn’t look like any bailouts will take place by any means.  Of course, there’s been little to no help for the big player market investors.  It’s hard to be sympathetic to these Wall Street entities.  They knew what they were getting into was a high risk proposition, but they couldn’t pass up the potential for profit.  And we all know that there can’t be gain without a potential downside.

The overall economy has managed to sneak by relatively unscathed so far in the whole scheme of things.  As more than 100 subprime mortgage lenders have failed because of the meltdown so far, there have been some turbulent days in the stock market as a result.  However, for the most part, all losses directly attributed to the crisis have been regained in a matter of days.

The Effects Spread World Wide.

What Does the Future Hold?

Looking at the bright side, this could actually all be just the medicine we’ve needed to begin to get back to common sense and back on solid footing when it comes to more responsible mortgage lending.  However, there’s still probably a lot more to come for the housing market and the economy as a whole.  Consider the span of businesses affected in a large way because of the changes in the housing market:

• New home builders
• Home improvement industry
• Banking industry
• Insurance companies
• Retail industry

All kinds of businesses in these segments will likely be posting declines directly attributed to the mortgage meltdown and the stock market will naturally show the results of the decline for some time to come.  As the economy reflects what’s happening, interest rates will continue to be impacted.  It’s also entirely likely that the U.S. dollar will continue to decline.

Alan Greenspan’s Take on the Matter.

The Conclusion.

It’s easy to see how a little housing bubble can cause increasingly huge waves throughout the entire economy – there’s really no refuting that this has happened.  The severity of the impact is really what is debatable.  Have we been through the worst of it already or does a major recession await?

Tags:home loan mortgage defaults mortgage meltdown stock market subprime implosion