The chickens come home to roost

MANIFESTO

For those of us waiting for various equity-related shoes to fall, these last few weeks have been a bit discomfiting.

The news in the subprime mortgage market got grimmer Tuesday, helping to drive the stock market down more than 240 points and raising concern the problems could be more widespread than first believed.

Consumers with such loans fell behind on their mortgages at the highest rate in four years in the fourth quarter and foreclosures started on all types of home loans rose to a record high, according to data released by the Mortgage Bankers Association ...

"The speed with which this thing has unraveled is really pretty amazing," said Bose George, an analyst at Keefe Bruyette & Woods in New York.

I suppose that's true, but now that all of the adjustable rate mortgages are moving from around four per cent to ten, it's all really hitting the fan.

Connecticut's senior senator, Chris Dodd, predicts that 2.2 million borrowers could be foreclosed. The ripple effects in construction, retail sales, and many other areas of the economy could be severe if such foreclosures occur.

And, indeed, the data aren't encouraging. For example,

The number of borrowers in Florida who were past due on their mortgages ticked up to 4.86 percent in the last three months of 2006, according to new data from the Mortgage Bankers Association.

And more borrowers are facing the possibility of losing their homes. Foreclosure actions filed against homeowners nearly tripled in Miami-Dade and Broward counties in January and February, compared to the same two months last year, reports the clerks of court.

The nervousness regarding the state of the economy is often ascribed to unscrupulous lenders who made loans to people who couldn't actually afford them. While such guilt exists, I have to think that the Federal Open Market Committee is mostly to blame. Specifically, when the bust in equities occurred in 2000-2002, the FOMC (And, let's face it: I'm really talking about Alan Greenspan here.) reduced the prime interest rates by more than half. (Greenspan also sanctioned the hideous Bush tax cuts, but that may be another story.) With such a gift from the Fed, prospective home buyers and enabling financiers couldn't resist dabbling in speculative real estate possibilities.

We're currently seeing the results of such thinking: As Greenspan hoped to ease the effects of one bubble, he created another. Moreover, Greenspan demonstrated what too many in Washington currently evince: Create a horrible mess, and then let one's successor(s) try to take care of it.