Blown Mortgage

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Go figure. From the way you would read it in the media these days the only problems on main street have to do with people with “those subprime mortgages.” It seems that the words mortgage and subprime have become inextricably linked together and, we’re told, that’s where the problem is. If I had a nickel every time I heard or read the phrase “…from trouble in the subprime mortgage market” or some variation thereof I’d be a wealthy man; but that rote commentary belies the much bigger problem facing our economy. The problem is not with subprime mortgages the problem is with the housing market and the mortgages tied to nearly all of those properties. It’s not a subprime mortgage problem, its a credit and collateral problem - and guess what? We’re all sitting on that time bomb.

It’s a bit amusing (but mostly deathly frightful) that everyone references the following aphorisms when making the case for a non-systemic problem in mortgage financing. They are:

• subprime mortgages make up a small portion of all mortgages
• home prices didn’t increase everywhere like in the bubble states
• homeownership is up via new opportunities for borrowers to buy homes
• real estate is a good long-term investment
• those that bought over the last 10 years have made a lot of money
• yadda, yadda

The problem is that these broad generalizations cover up serious issues that face ALL mortgage holders, not just those who “did well” or “got in” or are “subprime.” It seems that by labeling the problem as subprime it makes it safer or more manageable to those that are not subprime. By calling it a subprime problem we can put the problem in a nice little box and point to those poor people who are affected by it, or who made bad decisions or got duped or whatever, as being different and separate from the rest of us who aren’t subprime. It’s something we as people like to do: take a problem, box it up, slap it as a label on a group of folks not like us, and make it go away. The problem is that this won’t go away - and it doesn’t lend itself to being boxed up nicely in any way shape or form.

The problem is not contained to subprime borrowers. The problem is systemic and affects anyone holding real estate in the United States, from prime residential real estate to commercial building owners to land trusts and builders. These people and entities have all sorts of different credit situations and financing vehicles in place. They all face the same problem: the collateral tied to the financing is devalued. The problem is further aggrevated by our conditioning of the last 7 years. The cycle of refinance, maximize borrowing and increasing leverage has been running flat out for the better part of this decade; and that habit is a hard one to break (and one that doesn’t do well stopping cold turkey). This cycle of increasing leverage exists in all parts of our economy; not just in the subprime mortgage world.

This leverage is tied to a fundamental premise that the collateral is ever increasing in value. When this premise breaks down, so does the whole pyramid. And all land holders and debt holders are subject to the same forces that are weighing on all areas of our economy that are currently leveraged. From CDOs to second mortgages it is a fact of life that as the collateral backing the debt declines in value the value of the debt declines as well (especially if it’s beginning to perform poorly). Regardless of credit score this process is taking place across the country.

Prime borrowers are in as much (IF NOT MORE) trouble than subprime borrowers. Why? Because prime borrowers are afforded much more leverage than subprime borrowers. They were the ones given negative amortization option ARMs and 100% home equity lines on stated income and stated assets. They were the ones given the most rope because the thinking went “as long as prices increase and prime borrowers keep paying we’ll be fine.” Prime borrowers may keep paying, but prices ain’t headed up any time soon. This lack of appreciation is going to pin those prime borrowers to the wall when their payments increase to a level that is unaffordable compared to their earning level.

As I’ve said before, your FICO score can’t make your mortgage payment when it doubles on you.

And when the prime mortgage market merry-go-round comes to a stop (as it will in the next couple of years) a lot of folks who were “prime” credit risks will default just as hard and just as fast as those pesky “subprimers” fouling things up for us all right now. The prime folks are just a few quarters away from their implosion - it’s just that they got slightly longer fixed periods on their adjustable rate mortgages. They are not in any better position than subprime folks; it just makes us more comfortable to think of it that way.

So in conclusion, I am making an open call to reporters covering the mortgage miasma to stop calling it the subprime mortgage problem and start calling it the mortgage problem. Because prime, subprime, near prime, if you’re in a home that you own you are in this mess. No pointing fingers, no boxing this bad boy up. We’re all in the same boat, and we can’t do anything about it. The collateral has shrunk below our feet. The value isn’t there any more. The leveraged debt is still owed and there isn’t anything but our pocket books to pay it back. That’s the truth regardless of your credit score.

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