I Read the News Today, Oh Boy ... More Subprime Lending Woes

Cross-posted at my new digs, Ohio Daily Blog:

I read a lot of newspapers online, but we still get the Cleveland Plain Dealer and the New York Times in paper form and that's what we read during breakfast. This morning I turned to the business sections in each and was struck once again by the number of stories that relate to one degree or another to the crisis in the subprime mortage lending industry. From the PD:

* Mortgage worries are hurting automakers because "consumers were in no mood to buy a car this month as they faced rising mortgage payments and roiling financial markets, and some analysts already predict 2007 will be the worst year for U.S. auto sales in nearly a decade."

* The Gross Domestic Product grew by a healthy 4% in the second quarter, but economists expect it to slow to around 2% in the present quarter due to the current housing and credit woes arising from the subprime lending fiasco;

* Nobel economics laureate Joseph Stiglitz predicts a "prolonged economic downturn," although probably not a recession, due to the crisis. "Mortgage payments are going up, house prices coming down, incomes are stagnating. It's not a pretty picture. So the dynamics could unravel more and where it stops, we can't be sure," Stiglitz told reporters during a conference in Malaysia.

* Fairview Park-based Colony Mortgage Corp., employer of 88 at nine locations, is closing in September.

Turning to the Times:

* The Bush administration finally will announce several steps to help low-income mortgage borrowers with credit problems. Included is a change that will make borrowers who fall behind due to payment increases incorporated into adjustable rate mortgages eligible for mortgage insurance from the Federal Housing Administration, which may help them obtain refinancing. Previously Bush had insisted that market fundamental are strong and that no intervention is necessary, despite urgent pleas from Democratic leaders.

* The reason that the subprime mortgage crisis in the United States has been felt so strongly all around the world is the explosion in the global financial market of new finance vehicles like derivatives and structured products. Structured products are pooled assets that have been sliced into small, specialized pieces. The investments are so complex that international investors failed to appreciate the potential risks involved.

* H & R Block announced yesterday that the sale of its subprime lending unit, Option One Mortgage, might fall apart as credit markets deteriorate.

* The Mortgage Bankers Association, an industry group, has released a study showing that a significant portion of mortgage foreclosures involve investors seeking to turn a quick profit rather than homeowners paying for their primary residence. However, a big majority of foreclosures do in fact involve homeowners. The national average revealed in the study is 16% of defaults among loans based on strong credit relate to investors, while 12% of defaults among loans based on weak credit relate to investors.

That's a lot of news, most of it bad, and it shows how pervasive and troubling the crisis has become. In sum, the experts don't think the crisis will propel the country into another recession, but it is likely to result in at least a sustained economic downturn, with negative effects felt around the world.