Nobody expects the subprime inquisition

Housing prices plummet, borrowers fall behind on mortgage payments, Wall Street is shocked. What's wrong with this picture?

By Andrew Leonard
Published December 6, 2006 5:10PM (EST)

The Wall Street Journal led off a Monday story on trouble in the subprime housing loan industry with the following sentence: "Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace."

Really? This was unexpected? Come on -- when housing prices crash, a speedy increase in foreclosures and late payments on mortgages are as predictable as sleepless nights for real estate agents, especially for loans that were risky to begin with!

"Subprime mortgages" explains the Journal, "are loans made to borrowers who are considered to be higher credit risks because of past payment problems, high debt relative to income or other factors. Lenders typically charge them higher interest rates -- as much as four percentage points more than more-credit-worthy borrowers pay -- one reason subprime mortgages are among the most profitable segments of the industry."

Does the Journal really expect us to believe that none of the observers of the economy who worried about the surge in subprime lending during the height of the boom were ready for a harsh morning after? Quite the contrary: Just as the surge in popularity of fancy adjustable rate mortgages elicited contemporaneous concern about what would happen when interest rates rose, so did the spread of subprime lending lead plenty of sensible people to warn of hard times ahead.

It may seem like I'm picking at a tiny point here, but the addition of that one word, "unexpectedly," says that the editorial judgement on the story is that the news is not that Americans are getting in trouble on their loans at a rapid pace, but that nobody predicted it would happen this fast. And that's just not true. And it puts into serious question the much more significant conclusion of the piece (echoed in a New York Times story on subprime loans today) that the rise in foreclosures and late payments will have no significant impact on the mortgage industry and the American economy as a whole. Because it's exactly the same people who didn't expect quickly accelerating subprime loan trouble who are now telling us that they "don't expect any significant harm to the nation's economy or financial systems."

I guess if that does happen, the Journal will tell us it was unexpected. And it will be big news!

For a look back at someone who did predict, pretty closely, what would happen this year, we can go to Center for Economic Policy Research co-director Dean Baker's piece on the housing bubble published in January 2005, where he noted that "widespread declines in house prices will lead to a surge in mortgage foreclosures."

For an even gloomier update on Baker's views on the economy, take a look at his most recently published analysis. What does he expect for 2007?


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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