A Wall Street Journal commissioned analysis has confirmed that the epidemic of irresponsible & predatory subprime loans that has fueled astronomical real estate inflation, and threatens to bring down our financial system went, NOT to those who could not merit better financing, but to credit-worthy purchasers with high credit ratings.
Subprime Debacle Traps Even Very Credit-Worthy
As Housing Boomed,
Industry Pushed Loans
To a Broader Market
By RICK BROOKS and RUTH SIMON,
Wall Street JournalOne common assumption about the subprime mortgage crisis is that it revolves around borrowers with sketchy credit who couldn't have bought a home without paying punitively high interest rates. But it turns out that plenty of people with seemingly good credit are also caught in the subprime trap.
An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.
In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American Loan Performance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.
The numbers could have dramatic implications for how banks and U.S. regulators address the meltdown in subprime loans. Major banks, mortgage companies and investment firms have been rocked by billions of dollars in losses as shaky subprime loans -- which typically carry much higher, or rising, rates and other potentially onerous costs -- have increasingly gone into default. Many analysts expect hundreds of thousands more loans could go bad over the next several years. The Bush administration and major financial institutions are working on a plan to freeze interest rates of certain subprime loans in hopes of avoiding an even bigger meltdown.
The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy -- including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans -- perhaps foolishly -- with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.
The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals -- and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms. . . . . . . . . .
. . . . . . . . .
complete article at
http://online.wsj.com/article/SB119662974358911035.html?mod=hps_us_whats_news Major banking institutions have not been content to transform the industry into predatory, loan sharking parasites whose unconscionable fees and rates have been facilitated by "bankruptcy reform".
We now see that the real estate bubble which has made housing un-affordable has been built upon an epidemic of irresponsible predatory loans, not to the non-credit worthy, but to anyone who could be enticed to buy property at an unsustainable price.
Who will benefit, and who will lose, as the feds sustain astronomical real estate prices with a bailout?
_____________________________________________
Addendum:
A related, & not inconsequential, issue is the massive fiction of the current official U. S. government "inflation rate" figures, which DO NOT INCLUDE real estate sales prices.
Paul Craig Roberts, who began his Washington career in Ronald Reagan's Treasury Department (Roberts wrote the initial Reagan tax cut bill), but whose writings now have been banished from the right wing websites who formerly published his work (due to Roberts' outspoken opposition to the war in Iraq & the assault on civil liberties) discussed this in his "Return of the Robber Barrons" essay at Counterpunch.
Roberts not only discussed the current fraudulent & fictional "inflation rate" statistics (created to drive down social security payments and negotiated inflation adjustments in labor contracts), but presciently discussed the subprime debacle before it unfolded (His essay appeared in August):
In Richistan: Fantastic Wealth for a Few; Steady Decline for Many
The Return of the Robber BaronsBy PAUL CRAIG ROBERTS
. . . . .
. . . . With the real wages and salaries of American civilian workers lower than 5 years ago, with their debts at all time highs, with the prices of their main asset--their homes--under pressure from overbuilding and fraudulent finance, and with scant opportunities to rise for the children they struggled to educate, Americans face a dim future.
Indeed, their plight is worse than the official statistics indicate. During the Clinton administration, the Boskin Commission rigged the inflation measures in order to hold down indexed Social Security payments to retirees.
Another deceit is the measure called “core inflation.” This measure of inflation
excludes food and energy, two large components of the average family’s budget. Wall Street and corporations and, therefore, the media emphasize core inflation, because it holds down cost of living increases and interest rates. In the second quarter of this year, the Consumer Price Index (CPI), a more complete measure of inflation, increased at an annual rate of 5.2 per cent compared to 2.3 per cent for core inflation.
An examination of how inflation is measured quickly reveals the games played to deceive the American people.
Housing prices are not in the index. Instead, the rental rate of housing is used as a proxy for housing prices.
More games are played with the goods and services whose prices comprise the weighted market basket used to estimate inflation. If beef prices rise, for example, the index shifts toward lower priced chicken. Inflation is thus held down by substituting lower priced products for those whose prices are rising faster. As the weights of the goods in the basket change, the inflation measure does not reflect a constant pattern of expenditures. Some economists compare the substitution used to minimize the measured rate of inflation to substituting sweaters for fuel oil.
Other deceptions, not all intentional, abound in official US statistics. Business Week’s June 18 cover story used the recent important work by Susan N. Houseman to explain that much of the hyped gains in US productivity and GDP are “phantom gains” that are not really there.
Other phantom productivity gains are produced by corporations that shift business costs to consumers by, for example, having callers listen to advertisements while they wait for a customer service representative, and by pricing items in the inflation basket according to the low prices of stores that offer customers no service. The longer callers can be made to wait, the fewer the customer representatives the company needs to employ. The loss of service is not considered in the inflation measure. It shows up instead as a gain in productivity.
In American today the greatest rewards go to investment bankers, who collect fees for creating financing packages for debt. These packages include the tottering subprime mortgage derivatives. Recently, a top official of the Bank of France acknowledged that the real values of repackaged debt instruments are unknown to both buyers and sellers. Many of the derivatives have never been priced by the market.
Think of derivatives as a mutual fund of debt, a combination of good mortgages, subprime mortgages, credit card debt, auto loans, and who knows what. Not even institutional buyers know what they are buying or how to evaluate it. Arcane pricing models are used to produce values, and pay incentives bias the assigned values upward. . . . .
. . . . .
http://www.counterpunch.org/roberts08022007.html 
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