December 7, 2007

Freeze plan might not work

This piece from market watch is an excellent analysis of the depth and spread of the mortgage problem. This is another dimension why the subprime freeze plan will not work. In any case I am always skeptical of any government lead initiative as the inherent conflict of interest. Government or politicians are always looking for the easy way out to protect their positions and gain points with the voting public. And usually these actions are short term in nature and has no lasting effect.

I have gathered some figures to support the article from market watch courtesy of Wall Street Journal. Although you would expect that subprime delinquencies to rise but the biggest surprise is the jump in delinquencies in second mortgages and home equity loans. second mortgages delinquency rate jumped 27.6% in Q3 2007 from Q4 2005 the housing peak, and home equity loans jumped 98% in the rate of delinquencies in the same period. you can see the data here.

The increase in rate of delinquencies in an environment of good employment and job creation is unheard of. Employment rate as of this Friday was 4.7% suggesting close to optimal capacity for the economy so what gives in the rise of all delinquencies not just in housing but credit cards and car loans. Home owners have spent with reckless abandonment; the debt levels of the average household has grown beyond the ability to service the debt.

It will be interesting how this will play out in the next year.

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