According to an article in USA Today, a report to be issued today indicates that, among business economists, “subprime mortgages” are considered the greatest risk to the financial markets. They are, however, in good company, as “hedge funds” and new forms of credit card lending without traditional credit history checking are raising concerns.
Riskier financial strategies have been making the news lately, as “hedge funds,” described as “eclectic” in their strategy by an International Monetary Fund article, often located in tax havens and otherwise avoiding tax and regulatory issues, are causing concern. In the U.S., “subprime” mortgages have been enticing less-qualified borrowers with “teaser” rates and more recently an increasing foreclosure rate, and banks such as Bank of America are beginning to offer credit cards to anyone who has a “taxpayer ID number,” which is a number issued to anyone who pays taxes in the U.S. and does not have, for one reason or another, a Social Security number.
Risky “hedge funds,” sometimes run from offshore tax havens, have been making international news as a major problem in the financial world. One Harvard Business School professor, D. Quinn Mills, likened these investments to dot-com investments in unknown companies, promising huge returns based on industry growth. He also notes that wealthier investors – and some smaller investors, perhaps even as part of their 401(k) plans – are being offered these “funds of funds” through their regular banking contacts.
Subprime mortgages, which are mortgage loans to riskier borrowers, have good reason to be on economists’ minds. Colorado is ahead of the national average in subprime mortgages at 18% versus 13.5%, according to the Denver Post. At the end of the third
quarter, 10.4% of those were delinquent. Now, Colorado is also leading the way in foreclosures.
According to USA Today, defaults and delinquencies among subprime mortgages have been up sharply since late 2006, and the Denver Post notes that several dozen large subprime lenders have closed their doors recently.
USA Today notes that economists still expect “steady economic growth in 2007,” suggesting that the problem is seen as more of a warning sign.
According to originatortimes.com, a lending industry news website, a report by the Center for Responsible Lending indicates that subprime loans are a major source of foreclosures, and of those loans, one of the major problem loan types, known as “exploding ARMs (Adjustable Rate Mortgages)” is a loan whose affordability is much higher during the first couple of years, as they have an initial low “teaser” rate.
According to the site, Colorado and Nevada have been neck-in-neck for the status of highest foreclosure rate during the past year, with California and Texas leading for highest total number of foreclosures.
Although the Bank of America credit card program, and movements in a similar direction by Wells Fargo Bank, are in an initial testing phase, they represent yet another area in which financial policy is currently loose enough that banks and other financial businesses are being tempted to expand into areas of greater risk.
“Worst risk to market? Subprime mortgages”, USA Today, February 26, 2007 (Print Edition)