Oh, This Can't Be

A hat tip to Keith at the sometimes-guilty-pleasure blog HousingPanic.com for bringing to my attention the delicious story of housing bubble, Alt-A poster boy Casey Serin of iamfacingforeclosure.com in his debut in the pages of The Economist.

This nexus certainly conforms to the stated goal of the weekly magazine "to take part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress."

Here's what it looks like at the moment at Casey's blog:

Here's what it looks like in the free Special Report at The Economist:

CASEY SERIN knows all about the excesses of America's housing bubble. In 2006 the 24-year old web designer from Sacramento bought seven houses in five months. He lied about his income on “no document” loans and was not asked for anything so old-fashioned as a deposit. Today Mr Serin has debts of $2.2m. Three of his houses have been repossessed; others could share that fate. His website, iamfacingforeclosure.com, has become a magnet for those whose mortgages are in trouble.

Mr Serin and people like him are Wall Street's biggest uncertainty just now. How many Americans are saddled with mortgages they cannot afford on houses that are losing value? The answer matters to anyone who bought high-yielding mortgage-backed securities when a booming property market made mortgages look safe. It also matters to investment banks, which packaged the securities and often own subsidiaries that originate mortgages. It may determine whether America's economy falls into recession. It could even affect the outcome of next year's elections.

"Mr. Serin" - that's a bit much, no? For a twenty-something "would-be real estate mogul" who probably deems any publicity to be good publicity and clearly doesn't know the difference between the two?

This is truly one of the better "reality TV generation meets bubble economy" moments of the early 21st century.

Many months ago, after first discovering Casey's blog, the following simple comment was submitted by your humble scribe, "Youth is wasted on the young". This was originally related to me twenty years ago by a kindly old gentleman during a round of golf in Hawaii where he yearned for his form of old that he saw in my swing.

It took ten years to begin to understand this comment - it's doubtful that Casey ever will.

In any event, the quintessential Alt-A borrower of America's "housing boom gone bust" fades quickly in what is a comprehensive account of the mess that has now become the subject of Congressional hearings.

Well, actually, Congress hasn't gotten to Alt-A yet. So far, most of their attention has been focused on subprime loans and "predatory lending". They'll get around to Alt-A and ARM resets - according to The Economist, mortgage lending is too big a story and too big a market for it to fade quickly.

America's residential mortgage market is huge. It consists of some $10 trillion worth of loans, of which around 75% are repackaged into securities, mainly by the government-sponsored mortgage giants, Fannie Mae and Freddie Mac. Most of this market involves little risk. Two-thirds of mortgage borrowers enjoy good credit and a fixed interest rate and can depend on the value of their houses remaining far higher than their borrowings. But a growing minority of loans look very different, with weak borrowers, adjustable rates and little, or no, cushion of home equity.

Remember the words of former Fed Chairman Alan Greenspan back in 2005?

In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.

Uh-oh! Another prediction from The Maestro looks ready to be put to the test. According to data from The Economist, the picture is changing rapidly.

When the term "equity cushion" was first used, prices were rising so quickly that "negative equity" or "upside-down" had not yet entered the lexicon. From the odd looks of the "Less than -10%" entries in the tables above, it looks like the scale is shifting dramatically.

Also note that the "small fraction of households" across the country in 2005 with loan-to-value ratios greater than 90 percent has grown considerably - up to 16 percent over 10 percent. For adjustable rate loans originated since 2004, they are the majority.

The entire article is worth a read, particularly the discussion in the closing paragraphs on the involvement of a newly elected Congress to oversee these slowly developing events.

As in the mortgage lending mess unfolding today, Congressional action comes late in the story - Casey rightfully leads.