Magazine article Mortgage Banking

Life after Subprime

Magazine article Mortgage Banking

Life after Subprime

Article excerpt

We all are acutely aware of the terrible cost of the current crisis in the subprime market. In some ways, it is worse than we might have imagined.

According to The Subprime Lending Crisis: The Economic Impact on Wealth, Property Values and Tax Revenues, and How We Got Here (Joint Economic Committee [JEC], Washington, D.C., October 2007), here are some estimates of the potential household loss in equity when all of the accounting is done:

"For the period beginning in the first quarter of 2007 and extending through the final quarter of 2009, if housing prices continue to decline, we estimate that subprime foreclosures alone will total approximately 2 million.

* Approximately $71 billion in housing wealth will be directly destroyed through the process of foreclosures.

* More than $32 billion in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties.

* States and local governments will lose more than $917 million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures."

What a disaster. The fallout from the unfolding national financial distress already has affected thousand of workers. According to Challenger, Gray & Christmas Inc., Chicago, financial service companies have announced 140,442 job cuts through October. With two months remaining in the calendar year, at press time, financial company layoffs already surpass the previous record of 116,647 annual job cuts set in 2001. In just August and September, financial job cuts totaled 73,436-46 percent more than the 50,327 financial cuts announced for all of 2006.

Looking for a fix

Look hard enough, though, and it is possible to find a brighter side to most crises. In front of the subprime meltdown, none other than Ben Bernanke, chairman and a member of the Board of Governors of the Federal Reserve System, located the silver lining in the current mortgage crisis.

Testifying before the Joint Economic Committee on Nov. 8, Bernanke spoke these very encouraging words: "Recent developments may well lead to a healthier financial system in the medium to long term. Increased investor scrutiny of structured credit products is likely to lead ultimately to greater transparency in these products, and to better differentiation among assets of varying quality."

Surely the industry will be better off with tighter underwriting and appropriate risk pricing. To find relief for the individual borrower, regulatory agencies are pushing loan workouts as a way of cushioning the effects of impending default. The suggestion of pursuing massive workouts seems to carry a bleak and impermanent response to a systemic failure in the industry.

Even Bernanke's predecessor, Alan Greenspan, underscored the need to organize and codify loan mitigation and workout procedures. In an interview with CNN on Oct. 29, Greenspan argued that "the development of standardized approaches to workouts and the sharing of best practices can help increase the scale of the effort, even if, ultimately, workouts must be undertaken loan-by-loan."

I am mystified that such venerated economic and financial policy-makers would concern themselves with mundane operational solutions to a rip-roaring financial crisis. At a time when the very nature of mortgage banking may require redefinition, how far toward a comprehensive industry solution can improved procedures carry the industry?

Maybe the industry is more resilient than one would guess in the face of massive layoffs and widespread financial turmoil. How do lenders feel about their business prospects? As it turns out, lenders are not universally downtrodden. In fact, many are feeling pretty good about the near term.

In September and October, MORTECH LLC surveyed more than 300 lending organizations (MORTECH 2007). We found that more lenders saw business and profitability improving over the next 12 months than they did at this time last year (see Figure 1). …

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