Tuesday, August 14, 2007

Tell Ben Stein it Ain't Subprime: The American Prospect
Mystery Reader sends this cogent but disturbing analysis of the mortgage and housing situation from Dean Baker:

NYT columnist Ben Stein tells everyone that they [are] being Chicken Littles because they are worried about the fallout from the subprime meltdown. Mr. Stein calculates that of the $10.4 trillion in outstanding mortgages, only about 13 percent or $1.35 trillion is subprime. Of this, only about 5 percent, or $67 billion is actually in foreclosure. If the losses on foreclosed loans is 50 percent then we're talking about $33 to $34 billion. That's not a lot of money in a $14 trillion economy. The problem is that the Chicken Littles are a bit better at logic than Mr. Stein. The subprimes are melting down because house prices are worth less than mortgages. This is leading to rapidly increasing default rates in the Alt-A and prime markets as well. It does not make a lot of sense to payoff a $600,000 mortgage on a home that's worth $400,000. The problems are showing up today in the subprime market because these are the people with the least resources and therefore the ones who are first forced into default. However, as time goes by, and more homeowners realize the situation they are in, the subprime meltdown will turn into the prime meltdown. The chicken littles know this, which is why the markets are panicking.

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