"New" lessons from subprime troubles

By Robert Gray

I just read Secretary Paulson's speech on housing and mortgage market developments. I have always worked in commercial real estate, and except for my own home mortgage, I haven’t paid much attention to residential mortgages. But because of the uncertainty that has spread throughout the capital markets, everybody is affected now.

As I would have expected, Paulson has a deep understanding of the causes and policy implications of the problem. Still, I got the feeling that this came out of the blue – that something unusual happened this year. He writes: "in July as default rates surpassed their models’ projections, ratings agencies downgraded billions of dollars worth of subprime mortgage backed securities."

Subprime mortgages have increased from 1.4 million in 2001 to 10 million today, so clearly trouble has been brewing for a while. In August, Ray Torto wrote about this and pointed out that anybody who was paying attention couldn’t have been surprised by the blow-up.

 

Two years ago, Torto Wheaton Research warned that much of the growth in home ownership was coming from expanding credit to subprime borrowers. So the credit market was driving prices up beyond the level supported by the real estate fundamentals.

Secretary Paulson concluded that new lessons will be learned as the markets adjust. That's true enough, but I just wish we didn’t have to keep re-learning the old ones.