Alan Reynolds

When it comes to economic news, the press tends to be biased toward exaggeration and sensationalism. If some event isn't a "scandal," then it must be a "crisis."

The latest example of crisis journalism turned the phrase "mortgage meltdown" into an overnight cliche. It began with the effort to blame a worldwide dip in stock prices on local U.S. problems with subprime mortgage loans. According to The Associated Press, "Anxiety that a blowup of subprime mortgage lenders could spill over into the broader economy has roiled the finance markets in recent weeks and played a major role in the swoon on Wall Street that pushed the Dow Jones Industrial Average to its lowest levels in more than four years."

Facts never interfere with such an exciting story. The Dow was 12,226.17 on the day that story appeared. A year ago, the Dow was 11,109.32. Four years ago, in March 2003, it was 7,992.13. Besides, Shanghai was the first stock market to "swoon," and not because of defaults on subprime mortgage loans in Detroit or New Orleans.

"Crisis Looms in Market for Mortgages," was the title of a New York Times report by Gretchen Morgenson. She worried that "shares of big companies in the mortgage industry have declined significantly. ... At the heart of the turmoil is the subprime mortgage market, which developed to give loans to shaky borrowers or to those with little cash to put down as collateral. Some 35 percent of all mortgage securities issued last year were in that category, up from 13 percent in 2003."

Such sympathy for high-risk lenders seems misplaced, since they were rewarded with high interest rates for taking that risk. Subprime mortgage-backed securities have been a favorite game of hedge funds, which openly offer high risks to high rollers. The default risk on such securities was not unusually high last year.

A study by Michael Youngblood for loanperformance.com found "the default rate of subprime securities originated in 2005 rose to 5.1 percent in August 2006, at 20 months of age." That was substantially lower than the 9.7 percent default rate after 20 months on comparable securities issued in 2002.

Sensational stories invariably cite figures from the Mortgage Bankers Association showing that 13.3 percent of subprime borrowers were late making their payments at the end of 2006 and that 4.5 percent face foreclosure. Yet those same figures show, as Jeff Brown noted in The Philadelphia Inquirer, that "more than 86 percent of subprime borrowers are not late in payments, and more than 95 percent are not in foreclosure."

Christopher Cagan of First American Core Logic estimates that foreclosures will amount to less than 1 percent of mortgage lending.


Alan Reynolds

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