Realtors Blame Subprime Crisis on Greed

Tighter subprime underwriting and a flood of projected foreclosures may push home sales from 350,000 units to 250,000 units nationally, David Lereah, chief economist for the National Association of Realtors, said in an announcement today.

“From a broader perspective, today’s subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy,” Lereah said. “Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy.”

He noted Fannie, Freddie and FHA will be revitalized and help many of the displaced borrowers and warned against overreaction.

In a newsletter, Lereah said one-in-five loans originated during the past two years was subprime and compared recent subprime business behavior to that of orderly students stirring up a “wild ruckus when the teacher leaves the room.”

“It happens every time,” he said. “During the savings and loan crisis of the 1980s, S&L senior management wastefully purchased expensive fine art while their institutions were crumbling. Investors purchased company stock at triple-digit price/earnings multiples during the giddy 1990s dot.com boom, ignoring fundamental investing principles.”

Lereah noted over 30 subprime mortgage lenders bet on rising property prices — and lost.

“Wall Street companies that provide funding for the subprime marketplace got caught with their collective financial pants down,” the economist added.

While as many as half of all subprime borrowers may be unable to find financing, Lereah projects a much smaller 10 to 25 percent — depressing overall home sales. He said $300 billion in subprime adjustable-rate mortgages expected to reset by October will result in a disproportionate share of foreclosures in high-cost regions like California.

Lereah suggested poor underwriting practices likely carried over into the Alt-A market “and possibly even their prime lending markets as well,” adding that prime lenders may overreact in their underwriting adjustments.

Less than 1 percent of all homes will be affected by subprime problems, Lawrence Yun, senior forecast economist for the group, said in a newsletter. “So roughly speaking, 0.5 percent of all home will at most run into eventual foreclosure from the recent meltdown.”

Yun said subprime problems have caused the group to lower its price growth forecast to 1.2 percent from 1.9 percent. He reported the top states with the highest subprime share were California, Rhode Island, Michigan, Nevada and Illinois. States with the lowest proportions of nonprime loans were North Dakota, South Dakota, Vermont, Alaska and Montana.

“The excessive greed of some people wanting easy high-interest bearing income led to some companies lending to shaky borrowers during the housing boom,” Yun concluded. “All that has now come home to roost.”

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: mtgsam@aol.com