Subprime Blowup Caused By Brett Favre Signing with Jets, and a Bunch of Other Shit...Mainly a Bunch of Other Shit.

A guest post by my friend Richard Ridgeway:

 

 

We don't really get, nor can we get all the information for consideration of the enormity of the "subprime" blowup. But we can fill in some large areas that haven't had great attention. Full disclosure- I am in the housing sector (since 1998) and still gainfully working in it.

 

The main blame being peddled is that people took out loans they couldn't repay. It is true that loans were made to people that couldn't repay, But there were many people who took out loans that they never intended to repay (when the favorable environment changed).

 

The brilliant SNL parody very accurately displays the Silicon Valley couple that bought condos to "flip" (buying houses and quickly reselling) in a rapidly rising housing market. Unknowingly to the Democrat machine of Fannie and Freddie, these flipper investors were the true catalysts of the meltdown. Without the "flipper investors" it's very likely the Dem's Fannie/Freddie fraud would still be churning unabated. You see, flippers were considered subprime borrowers as well. Those loans were/are grouped in with the low income borrowers. Here's why they are subprime and a demonstration of what happened:

 

Those flipper loans were not conventional loans. The flipper would only need to be asset worthy to qualify for an exotic 0 down ARM (adjustable rate mortgage) loan with no documentation. If they could show a bank account or asset that could potentially cover a default, they could qualify. As long as the market stayed hot and home prices escalated, they were more than OK. The flippers were sought after by the mortgage companies because of the quick turnaround.

 

A while back, in researching the subprime topic for individuals that I was contributing information to, I confirmed (to my satisfaction) my flippergate assumption. This information comes from the Cleveland Federal Reserve. Although it's from 2007- it's still pertinent, especially the historical perspective charting.

From The Cleveland Fed site:

 

 

Note the subprime fixed rate borrowers (these were obviously buyers for a primary residence) meeting their obligations (to approx. 4% foreclosure starts). In fact, the subprime fixed rate default rate was trending down since 2004.

 

Now look at the subprime ARMs (investor-flippers would be in this group) have increased since 2004 (to approx. 10.5% per year foreclosure starts). Notice the historical perspective.

 

The NAHB (National Association of Home Builders) Housing Opportunity Index is more revealing.

 

It dates back to 1991. Look at the ARMs in particular for 2007 Quarter IV. Only 8% of the loans originated were ARMS. That's the lowest of any Quarter back to 1991. Compare 1994,'95 and '96 ARMs to those of 2004, 2005 and 2006 when the supposed "sub-prime slime" infiltration was at its peak. It's not even CLOSE. 1994 Q IV was 53% ARMs and 1995 QI was 52% !!! The highest of ARM share between 2001-2006 was Q III 2004 at 38%.

Tell me - where was the hand-wringing all of those years when ARMs were being peddled down the gullible public's throat? I'm at least smart enough to know ARMs weren't invented by "W" and smart enough to know there was plenty of foreclosures dating back to the beginning of mortgages in the U.S.  It's those hot-market culprits ( Florida, Arizona, California, NY, etc.)  where our flippergate culprits did their business.

What makes all this so important is that our flipper-investors usually bought multiple houses and at higher price tags than our low income subprimers. The rapid value decline in those hot-markets combined with the multiplier of the flipper's bad paper skewed the number of foreclosures and perceived value. Remember, all of the mortgages were pooled together in various packages and sold or used as collateral throughout the world. And with the subprime paper added in with prime paper, the servicer could get a higher interest return for those pools containing the subprime. For years the low income, subprime default would be a fairly well-known factor and financial institutions were accustomed to dealing with those predicted numbers. The poison pill of the flippers defaulting on their obligations was not accounted for.

The good news is that these type flippers and the loan instruments they used are gone. Their failure also helped expose the Democrats criminal dereliction involvement within Fannie and Freddie. The bad news is that the entire subprime party and their enablers (read Democrats) now head back to their previous hangout. It's called The FHA. And make no mistake. The  FHA is where the subprime schemes were hatched.  FHA loans are not considered subprime. But they have many characteristics of the subprime loans. With each passing year FHA loans dwindled as the subprime markets took hold. The more conventional market's idealists have seen how they could play the same game at a higher dollar level. They adapted, expanded and perfected those ideas into the exotic instruments that were the catalyst of the subprime blowup. The FHA has a dollar amount ceiling on loan limits. That ceiling has nearly tripled in most states since 2000. With those ceilings being constantly raised and the old housing mandates from Congress which still are in place-- we're just shuffling to refill the old swamp.

I sent an email to whom I consider the nation's best economist, Don Luskin from The Conspiracy to Keep You Poor and Stupid and I laid out that scenario for our new and improved subprime going back to the Paradise City of The FHA to see if he thought it was valid. Don's reply  to me  was only 2 words -- "Absolutely right. "...

Subprime, it doesn't rebuild -- It just reloads...