AFSCME 3357-HOF'S BLOG

The Mortgage Lender IMPLODE-O-METER
Chronicling the Opening Shots of the Great 2007 Depression

In the news today, giant British Bank HSBC announced that it was going to make a financial reserve against expected losses in the range of $10.6 billion. That amount is the same order of magnitude as the cost of the 25,000 troop "surge" in Iraq. HSBC's stock has taken a 2% hit on the news. In fact, HSBC's $10 billion charge is just the tip of the iceberg when it comes to financial losses relating to bad mortgage loans. For years now, the mortgage industry has played loosey-goosey with other people's money writing loans that no thinking person would write: no-doc loans, 120% loan-to-value, 100% subprime with exploding interest rates . . . the list goes on.

While the real estate market was hot, the bad loans could be covered by increasing home values. Now that the market isn't hot, stupid loans can turn a burst bubble into a death spiral in many areas. Bad loans result in foreclosed and abandoned properties, which results in lower home values for neighboring properties, which causes an inability to refinance, which causes more defaults and foreclosures, etc. etc. etc. Ultimately, the total cost of the bad loans could exceed the cost of the Iraq war. In fact, I've heard the number TRILLION seriously discussed in relation to this mess.

All of this gets to the central link of the post. A guy named Aaron Krowne runs a blog called the Mortgage Lender Implode-O-Meter. This blog is an excellent source of information and perspective on the troubles in the mortgage industry. Since December 2006, Aaron has tracked news stories announcing the demise of 19 mortgage lenders. It's amazing that this subject has gotten less attention in the press than Britney's style of exiting a limo.

Right now there are hearings in Congress concerning possible legislative remedies for abusive mortgage loans, but as far as the current crisis goes, that's like closing the barn door after the cow has escaped. It looks like the economy is just going to have to take its lumps. I just have a bit of concrete advice. Get out of any financial services mutual fund that you may have, and watch your bond funds carefully. If you have a bond fund that invests heavily in mortgage-backed securities, get out now.