“Never let facts get in the way of a good story” is the accepted wisdom of tabloid journalism, but it looks like it’s also become the guiding light of finance reporting when it comes to the US subprime mortgage market.
When the animal spirits are as edgy as they have been over the past couple of weeks, it doesn’t take much in the way of a screaming headline to spook them. That was the case on Wall Street on Tuesday night with the fall there knocking on to our Wednesday market.
The headline in question concerned the growing problems of the US subprime mortgage market and the jump in loan delinquencies, with plenty of organisations printing and broadcasting the worst. For example, even the BBC appeared to apply the Mixmaster:
Late mortgage payments and home repossessions in the US have hit their highest level since records began, official figures showed.
Well, no, not really. US mortgage delinquencies are running not far away from what they’ve averaged over the past quarter of a century – but that doesn’t make for much of a story.
The subprime lenders are in trouble, as they should be, especially those at the sharky end of the business. Trouble is what you eventually get when you lend money to people who can’t afford the repayments and then increase the interest rate.
Fortunately there are still some folks around who do perspective. Readers of the morning commentary by Macquarie Bank international economist Mark Tierney should not have been spooked.
This graph tells the real story:
And Tierney’s commentary rounds it off:
It is important to put the current problems in context. The Q4 mortgage delinquency rate was still below the rate of Q2 2003. The
trough was a delinquency rate of 4.31% in Q1 2005. So, yes, a rising
trend has taken hold. But so far it is not that unusual.
It is certain that the delinquency rate will rise further. How
much further is the real issue for US markets. No one really knows. Yet
it is worth remembering that the Q4 2006 delinquency rate was still
below the peak of 2001. Was this a period of huge distress in housing
markets? Clearly not. Interestingly, this delinquency rate was below the peak of 1991. And this was a period of a huge problems in both housing and the finance associated with housing. Then there was the delinquency surge to 1985, which was a soft landing in the US economy.
The lesson here is that rising mortgage delinquencies can be a
big problem at times. At other times, it makes little difference.
And with continuing strong employment and a soft landing in prospect, this looks like one of the times that it should make little difference. Just don’t tell the headline writers that.