The subprime crisis circa May 2007

This evening I am working on two projects. Firstly, I'm updating my notes for a talk on "The Financial Crisis: The View from Vienna". In that I provide a crude chronology which really starts in March 2007 with the collapse of the subprime mortgage market. Note that it wasn't until Summer 2007 that the securitisation market collapsed, September 2007 that Northern Rock happened, March 2008 that JP Morgan took over Bear Stearns, and September 15th 2008 that Lehman went under and the financial world changed. I'm also writing up a paper applying the Austrian theory of the trade cycle to the UK housing market in the build up to the crisis.

Back in December I "put my money where my mouth was" and tried to reveal the extent to which I "foresaw" the financial crisis. I quoted from a policy paper that I wrote but didn't find anyone to publish. After identifying the subprime market as being a potential source of an Austrian crisis, I provded a brief survey of potentially relevant developments. They were:

Paul Dales (a Capital Economics anlayst) says that 13% of subprime loans are now in arrears, and default rates have risen to4.5%

The second-largest subprime mortgage lender – New Century Financial – is on the brink of bankruptcy

According to Credit-Suisse “marginal” borrowers account for a third of subprime mortgages.

The Mortgage Bankers Association’s National Delinquincy Survey says that the delinquency rate for mortgage loans on one-to-four-unit residential properties is up 25 basis points from a years ago, “The increase was driven by increases in delinquencies for all major loan types, most notably for subprime and FHA loans.”

In the UK the Council of Mortgage Lenders recently announced that mortgage repossessions are up 65% from last year, and forecasts future rises.

The Department of Constitutional Affairs reports a 29% rise in the number of repossession orders against mortgage holders in England and Wales since 2005. Bankruptcies rose by 34% in England and Wales last year, and there was a 59% increase in people who were declared insolvent.

You'll have to take my word for it, but that was written in March 2007.