The mortgage crisis

The New York Times carries a frightening story today on the rise in mortgage defaults. Far too much of the Bush economy depended on lending institutions handing out adjustable mortgages to folks who could not reasonably be expected to keep up with the payments. Those folks routinely lied about how much they earned -- and the lenders required little or no documentation to prove income.

Already, more than two dozen mortgage lenders have failed or closed their doors, and shares of big companies in the mortgage industry have declined significantly. Delinquencies on loans made to less creditworthy borrowers — known as subprime mortgages — recently reached 12.6 percent. Some banks have reported rising problems among borrowers that were deemed more creditworthy as well.

I'm reminded, in a way, of the Savings and Loan scandal, which also focused to a large degree on loans to unworthy applicants.

Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.

In the S&L crisis, misleading accounting practices turned bad loans into "assets."

As the current bubble bursts, the poor will be hit hardest, as "subprime" borrowers lose their homes and enter the rental market, which is already obscene in many areas of the country. Here in Los Angeles, about a year ago, I saw a flyer advertising amarvellous opportunity to share a room for $600 a month. On the other hand, those hoping to enter the housing market will see falling prices.