Subprimes Cause Stocks to Fall?
The Subprime Mortgage Mess Needs to Be Cleaned Up!
February 27, 2007 saw a 416 point drop in the Dow Jones Industrial Average. This fall may be due to the weakness of subprime mortgage portfolios
The mojo of the American stock markets, specifically the DJIA (Dow Jones Industrial Average), appears to have run dry, at least temporarily, based upon Feb. 27th's 416 point drop. While caution must be applied is terming a roughly 3% decline as a "collapse", there are indeed some troubling elements to this story of Vegas East, the most significant being the fragile subprime mortgage market.
Wells Fargo leads the list of U.S. financial companies with heavy exposure in the subprime realm. As a brief explanation for this term, subprime refers to the subset of loans out of the collective lending portfolio that are extended to those with poor credit, little or no income verification and less-than-rigorous appraising techniques. While some right-wing commentators have claimed that this is a cover term for lending to illegal immigrants, clearly this practice has emerged as a more widespread prop over the last several years to balance what would have otherwise been a stall or even a significant downturn in new home construction and existing home purchases. And now that foreclosures of these subprime mortgages have skyrocketed, the position of companies like Wells with heavy exposure is a precarious one, hence the contribution to the overall market downturn.
Over 70% of American residents (note the use of this term istead of "citizens") are property owners as of the last statistical year of 2005. This is a huge increase from the decades-long relatively stable proportion of 50-55% home ownership, and it has only been in the last decade that this has occurred. Now, this has long been held as a hallmark of stability and success, but I would argue that instead, with little or no equity required for home ownership, it instead represents debt slavery on an unprecedented scale. Some mortgages are being offered for the unbelievable terms of 40 and 50 years - a cynical admission that we truly will always be making some sort of interest-laden payment to the financial powers-that-be.
Making payments, that is, until one can no longer afford it, and then the foreclosure/bankruptcy syndrome begins in earnest. There is no quick fix to this terrible ailment, but as a start stringent regulation should be applied to the mortgage industry, with mandatory 5% equity investment in any mortgaged property before the loan can be issued, with no piggybacking or gifting programs allowed (more about these end-arounds in another article). Like any mess that is made, it will take a long period of disciplined effort before there is a turn-around, but with the option being the entire collapse of the housing lending industry, any rational obderver would have to admit that it is a path that must be taken.
