It's still the mortgages stupid!

In those halcyon days when U.S. housing prices were rising, defaults didn't lead to systemic capitalist crises. In fact, they didn't impact much beyond the creditor and debtor in the contract. Creditors could appropriate your house and make a profit upon resell (hence the incentive for trumped-up loan applications, some of which inflated borrower incomes by up to 50 percent). And many debtors, even if they could make monthly payments, knew that creditors couldn't take any more than the home itself. As we know, everything changed when housing prices fell some 20 percent. Finance wonks tell us we can expect another 15 percent fall, which would double the amount of homeowners with loans greater than their home value. Any bailout or rescue plan that ignores this seems likely to fail.

Also scary is the so-called Alt-A mortgage threat. These mortgages are one notch less risky than subprime paper. And of course, they sound extremely enticing: borrowers were given an initial interest rate of 1 percent and were exempt from repaying the principal in the first several years. As is often the case, one day down the road, they will reset. Frédéric Lordon in the October issue of Le Monde Diplomatique describes the position of the average option adjustable rate mortgage (the Option-ARM category is just one breed of Alt-A):

The average Option-ARM borrower can expect to see repayments increase by 63% at a stroke. According to the financial services company Bloomberg, 16% of holders of Alt-A mortgages agreed since January 2006 are more than two months in arrears. Since there is a delay of between three and five years before the rate is reset, defaults can be expected to increase next year and continue until 2011.

Lordon also mentions that subprime loans totaled a mere $855bn where Alt-A mortgages amount to $1,713bn. I suppose this doesn't seem like much when leaders are desperately trying to avoid a financial collapse before Monday morning when stock markets open, but it's something to look out for in the coming months.

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In other news two wonderful and brilliant friends put up a website called Radical Perspectives on the Crisis:
http://sites.google.com/site/radicalperspectivesonthecrisis/

It is extremely useful, please check it out!