Classic economics teaches that increased volatility should be managed with increased reserves in order to ride out the more frequent or deeper troughs that will be coming. Unfortunately, most of the “reserves” that people had are no longer there. Perhaps the biggest “reserve” was a spouse (usually wife) who didn’t work, who could go back to work if the husband lost his job. Now, with many families dependent on both incomes just for daily needs, that reserve is gone. Similarly, overall savings are down, especially once IRAs are taken out of the picture (they can’t be tapped for immediate needs); unemployment insurance is being cut; and health insurance is declining.

Just about the only reserve left for most people is home equity. Is it any wonder then, that as income volatility has risen and overall safety nets (both private and public) have eroded, that the last remaining financial reserve is being tapped more frequently?

Based on my own experience talking to borrowers in one small Northwest city where I work as a newspaper reporter, a great many subprime borrowers are, as Yves suggests, using these loans to get money out of their home equity in a rising market. They are not using these loans to achieve “the dream of home ownership.” They already have a home. They see its value soaring, and they want to enjoy that wealth now, or at least, pay off their high-interest consumer debt with lower-interest mortgage money. That’s not intrinsically foolish, but it can be done in a foolish way.

As others have pointed out, many subprime lenders have marketed these kinds of arrangements very aggressively, using marketing to create demand for their product.

Oh btw, Bonddad had this more on Employment. The US only has one sector for job growth it seems, health care.

The other one was the financial sector, but the FT has had on occasion over the last year that there has been an exodus of those jobs (outsourcing & such) to China (cheap labor) and London (location). In other words, the US is beginning to lose one of the last two areas for growth.

-A-

One huge problem with most of the subprime lending is dubious classification. Apparently (I think I read this on Calculated Risk) loans are classified by the origination channel. Thus all loans by a “subprime lender (think New Century) are subprime, while all loans by a prime lender (think Wells Fargo, which was the biggest full service bank in subprime) are prime.

Now I might not be 100% right on Wells (if it had a subsidiary that did only/mainly subprime, that might be categorized separately as subprime, but subprimes done through regular banking channels would be designated as prime).

You can see how we are already in trouble..

That’s why I am most impressed by the American CoreLogic analysis done by Christopher Cagan. It looked at two massive ARM databases and drilled down to the mortgage terms. And you could see all their assumptions and what impact they had on the result. A very solid piece of work, and you can tinker with it if you want to.

The problem with it is it only dealt with ARMs and the reset issue, but it didn’t limit itself to subprimes.

Have you eyeballed the Center for Responsible? Lending report (data only 1998 to 2004)?

Gee, I’m not trying to make people feel sorry for the folks who got in over their heads in debt, but to point out that unless policy makers understand in a more granular way how this mess came about, they may go off half-cocked in terms of remedies.

In a significant number of cases, the subprime borrowing may be the last gasp in a bigger consumer debt problem. That would point to a very different line of thinking than the common assumption, that a lot of people bought more housing than they could afford.

Yves you have succeeded in the impossible and made me feel sorry for some Americans.

Have you seen Health care services costs inflation?

Did the White House Rig the Stock Market?
” . . . . the stock market was deep in the red all day, with the Dow trading down more than 300 points at its nadir because of investor fears about the mortgage credit crisis. Then as the session drew to a close, the stocks staged an amazing comeback. That huge deficit was nearly erased as the market finished with a miniscule 16-point loss for the day. Then on Friday, stocks soared after the Federal Reserve announced a surprise cut in the discount rate. . . . “

From 1997. . . .
Plunge Protection Team
” . . . . The officials conclude that a presidential order to close the NYSE would only add to the market’s panic, so they decide to ride out the storm. The Working Group struggles to keep financial markets open so that trading can continue. By the closing bell, a modest rally is underway. . . . “

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