Aftershock: Protect Yourself and Profit In The Next Global Financial Meltdown, Second Edition

Pop Goes the Housing Bubble

The most important thing to understand about the current housing crunch is that it’s not a subprime mortgage problem whose contagion spread to other mortgages; it is a housing price collapse. If home prices had not declined there would never have been a subprime mortgage problem at all. If home prices had continued rising as they had been rising in the past, the low introductory, adjustable-rate subprime loans would have simply been refinanced into new low introductory, adjustable-rate subprime loans based on the higher equity in the home, and everything would have been just fine.

But, with a housing price collapse, the low introductory, adjustable-rate subprime loans were doomed. These subprime mortgages were not the cause of the problem; they were merely the first to get hit. If you have a housing price collapse and not just a subprime mortgage problem, then as housing prices continue to collapse, the Alternative A-paper (Alt-A, no documented income) “liar loans” start to fail. Loans made on investment properties also get hit. Fancy mortgages to people with good credit that allow the payer the option of paying less than the current interest owed and no principal at all (so called option adjustable-rate mortgages) take a hit, too. Home equity loans get pinched. Eventually, as the housing price collapse continues, perfectly good prime mortgages get hit as well. It’s not a “spreading contagion” from the subprime problem, as the press so often tries to ...