Subprime Mortgage Market in Flames

Have I got a good deal for you - a home mortgage loan fixed at 1%! Yes, that's right, fixed at 1%. And the best part is, you can pay what you want each month. Want to put more down one month? Go ahead! Want to pay less? That's OK, too. Remember, just because you're not paying down the principle, doesn't mean the house is not increasing in value!

Sound familiar? This is the sort of filth that's been spewing out of the subprime mortgage industry for the past several years. It's particularly bad on AM radio.

There are only so many loans that can be written for "credit challenged" individuals buying obscenely overpriced real estate with little to nothing down before the house of cards collapses. We're starting to see that collapse in the subprime market. BusinessWeek has a good article published recently titled, Why Subprime Lenders Are In Trouble, which comes on the heels of many mortgage companies reporting troubles within their subprime departments.

The reasons for the subprime mortgage market's troubles are not surprising. As the housing boom grew in the first third of the decade, mortgage business grew apace. But as rates started climbing, sales started declining, and prices grew stagnant, the margins thinned and the growth during the boom times became overgrowth dragging down the bottom line. Also, these companies ditched traditional risk evaluations. Why not dole out a NINA 100% LTV loan to a credit risk? After all, it's about keeping volume up and closing deals, we'll worry about whether the application's stated income really is legit later. Such head in the sand mentality works when the market is booming, but quickly crumbles once the boom turns into bust.

The big question is how much of this malaise will seep into the prime mortgage market. Being an RE bear, I would be surprised if the prime market isn't hit hard. Too many loans were given out to buy "investment" properties, with little to no down and little to no income or asset verification. The rest of this decade will be an interesting one for the RE market. How far will prices slip? How long before there's any kind of sustainable rebound in sales or price? How will counties and cities deal with budgets that fall short because of the decline in property and RE-related taxes? How many construction workers, mortgage brokers, and RE agents will be looking for new jobs? Interesting times!