From the Dallas Morning News:

Systemic risk is on the bubble

The mortgage market remains a mystery to virtually every American.

For starters, the sheer size is inconceivable; it’s hard to get your mind around a fast-growing $8.7 trillion market. Even saying it’s more than twice the size of the U.S. Treasury market doesn’t put things into perspective for the layman.

Try this bit of context, then: The mortgage market is so big that it has the ability to introduce systemic risk into our financial system.

Systemic risk is risk that affects an entire financial market or system, not just specific participants. As such, it’s impossible to escape systemic risk through diversification.

Sound too alarmist? Consider a few facts:

•The collateral backing mortgages is stretched precariously thin – one in 10 homeowners has zero-to-negative home equity.

•Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That’s well above the 13 percent average share for the decade through 2005.

•Even after adjusting the rate downward to account for Hurricane Katrina, mortgage delinquencies ended last year at 4.55 percent, an 18-month high. And subprime delinquencies are pushing 12 percent.

•Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments.

•In the next two years, about a quarter of all outstanding mortgages – or more than $2 trillion worth – will reset at higher rates.

•A record 62 percent of commercial banks’ earning assets are mortgage-related.

Let me just add a few more in case those didn’t raise your eyebrows..

• 43% of first-time home buyers did so with no down payment in 2005.

• The median down payment for those first-time buyers was 2% (on a $150,000 home).

• ARMs accounted for almost 40% of mortgages originated in 2004 and 2005.

• $600 Billion in equity was cashed out through refinancing in 2004.

• $834 Billion in equity was cashed out through refinancing in 2005.

Caveat Emptor!
Grim