Archive for July 27th, 2009

10 Myths over subprime mortgages

July 27, 2009

Yuliya Demyanyk points to 10 myths about subprime lending in this loan. The lost includes virtually everything under the sun.

Myth 1: Subprime mortgages went only  to borrowers with impaired credit

Myth 2: Subprime mortgages promoted homeownership

Myth 3: Declines in home values caused  the subprime crisis in the United States

Myth 4: Declines in mortgage underwriting standards
triggered the subprime crisis

Myth 5: Subprime mortgages failed because people used homes as ATMs

Myth 6: Subprime mortgages failed because of mortgage rate resets

Myth 7: Subprime borrowers with hybrid mortgages  were offered (low) “teaser rates”

Myth 8: The subprime mortgage crisis in the United States  was totally unexpected

Myth 9: The subprime mortgage crisis in the United States  is unique in its origins

Myth 10: The subprime mortgage market was too small to cause big problems

In the end she says:

Many of the myths presented here single out some characteristic of subprime loans, subprime borrowers, or the economic circumstances in which those loans were made as the cause of the crisis. All these factors are certainly important for borrowers with subprime mortgages in terms of their ability to keep their homes and make regular mortgage payments. A borrower with better credit characteristics, a steady job, a loan with a low interest rate, and a home whose value keeps increasing is much less likely to default on a mortgage than a borrower with everything in reverse.

But the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. The crisis had been building for years before showing any signs. It was feeding off the lending, securitization, leveraging, and housing booms.

She has even written a paper to explain a few ideas about the sub-prime market.


South Africa and India- same set of problems?

July 27, 2009

Brahima Coulibaly and Trevon D. Logan and Federal Reserve have written a paper on South Africa’s macroeconomic progress:

The abstract says:

During Apartheid, there was little need for redistributional policies or to borrow for public works since the vast majority of the population was underserved. With the arrival of a representative democracy in 1994, however, South Africa faced a unique problem–providing new and improved public services for the majority of its citizens while at the same time ensuring that filling this void would not undermine macroeconomic stability.

Over the past fifteen years, policy makers have achieved macrostability, but progress on social needs has been below expectations and South Africa continues to lag behind its peers. This paper reviews the progress made so far and examines the challenges ahead for the upcoming administration. Our analysis suggest an increase in skill formation as a possible solution to the policy dilemma of fulfilling the outsized social demands while maintaining macrostability.

In sum, the paper says South Africa’s performance on macroeconomic parameters is quite good but has not delivered on social development. Infact they have worsened and is a cause of concern. President Mbeki had to resign despite a strong macroeco performance.

The paper also tells story of Zimbabwe which tried to do the opposite after its independence- social development first but was given up in the middle for macroeconomic growth to get more foreign investment. The delicate balance was lost and the end result was it could not achieve anything.

The paper stresses that SA should maintain the delicate balance and actually both can be achieved. SA focused on capital intensive industries and as a result there is a mismatchg between demand for skilled labour and supplyu of unskilled labour. The solution is to increase the supply of skilled labour to match the demand for the same. This will lower the social unrest.

Well, this is so similar to India’s probelm as well. India became independent in 1947 and policy was more inclined to the social development. From 1991 onwards we started looking at macroeconomic stability but social development deteriorated. Infact, just like SA we also lag behind on social development parameters in similar country group.  The Poverty numbers have actually worsened. In India also, economists suggest the same thing- the need for skill development (I think it is more important to have labor intensive industries)

However, what puzzles me more is why hasn’t macroeconomic growth/ stability led to increase in social development? Isn’t that what economists say- grow first and rest will follow. China, India I know face the same problem and now South Africa faces the same issue as well. Why doesn’t growth lead to alleviation of the social issues?

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