On The Sub Prime Tidal Wave

The Journal today shows off its peerless graphic design team with a fantastic illustration of the past three years of subprime mortgage lending.

Wall Street Journal charts the sub-prime tidal wave

The accompanying article reveals little that the bubblistas haven't been crowing about for years, but a few bits bear repeating here. The first reiterates my view that the housing market correction has many years before recovery.

The data also show that some of the worst excesses of the subprime binge continued well into 2006, suggesting that the pain could last through next year and beyond, especially if housing prices remain sluggish. Some borrowers may not run into trouble for years.

[As an aside, am I the only one who noticed how many of this year's Inc. Magazine 500 fastest growing companies were mortgage lenders?]

The second gets to a less commonly asked question about the whole subprime blowup--who really is the "victim" here? Does anyone really deserved to be bailed out by the feds?

Last September, Darla Ball, a printer and copier saleswoman, purchased a $460,000 home in Las Vegas using an adjustable-rate subprime loan with an initial rate of 8.2%. At the time, she says, she expected to refinance before her interest rate resets to 14% next year, which will raise her monthly payments to $8,000 from $3,700. But in the past year, she says, prices of comparable homes in her subdivision have fallen to $310,000, which means she would not qualify for a new $460,000 mortgage, unless home values go back up to that level, an unlikely scenario. She says she has stopped paying her mortgage and is trying to negotiate with her lender. "I'm going to lose my home anyway," she says, "so why pay?"

Let me get this straight, Darla. You knowingly took a deal from a lender willing to front you the cash, despite your already bad credit, with super low payments to get yourself into your dream home. Now you're living there and NOT EVEN PAYING? Bad luck, sure. A risky investment that didn't pay off, that happens. I'm sure you didn't at the time have a deep appreciation for the highly leveraged scenario you put yourself in. God knows we've all made risky investment decisions that in retrospect were crazy-stupid. (As they say, experience is not something we get until just after we need it.)

What riles me is that this is a perfectly legal deal with two parties taking risk in exchange for an enticing return. Is this really a situation that deserves to be bailed out? So-called predatory lending gets a lot of headlines. No doubt fraud has been comitted in many cases. It's just a bit hard to must a ton of sympathy for any of the participants. [Another aside: Make sure you read Michael Lewis' hilarious satire of this position on Bloomberg.]