If you thought Citigroup (C) was an unwieldy beast which is hard to turn around, you should have a look at the subprime mortgage industry. It's now been well over a year since people started to get shocked by subprime default rates rising much more quickly than anybody had anticipated. And the rational response to such news would be to tighten up underwriting standards significantly, in an attempt to contain the problem. But did that happen? No. Judging by default rates on 2007-vintage mortgages, underwriting standards haven't tightened up at all – as I suspected, back in August.
Michael Youngblood of Friedman Billings has crunched the numbers:
“There are $10.6 trillion of mortgage loans outstanding in the U.S., and even if the brakes had been slammed, it was going to take a long time to slow this locomotive down,” said Mr. Youngblood, who has researched home lending for more than 20 years. “And I don’t see that the brakes were slammed on or that the engineer had a new track to follow. That track only now seems to be appearing.”
Dean Baker says that falling house prices, not resetting mortgages, which are responsible for the ugly numbers on the 2007-vintage mortgages; I think it's really, at base, an underwriting issue. House prices stopped rising a while back; it's the lenders own fault if they continued to make loans which could only be repaid in an environment of continued strong house-price appreciation.
