Costa del Subprime

With all the discussion of the subprime mortgage/liquidity freakout in the United States, I wondered whether European mortgage lenders offered the same crazoid mortgage products that are available in the United States.

The answer, as always, is yes and no. Here's a tidy summary of the similarities and differences in US and European mortgage trends, along with some statistics, analysis, and predictions.

In the US subprime mortgage bubble, we are now in phase two [ie, prolonged state of denial]. It is difficult to explain rationally why anyone would want to give out large mortgages to people with no credit rating, or why a bank would want to give out interest-only mortgages at more than 100 per cent of a property’s value to anybody. Most of those products are based on irrational expectations by lenders and borrowers.

The European Union is a little behind the US when it comes to such crazy financial innovation, but only a little. There is a subprime mortgage industry in some markets, such as the UK and Spain. You can also find interest-only mortgages. Unsurprisingly, these are also the markets that have seen the strongest increases in property prices over the past 10 years. The Europeans are still in phase one [ie, bogus economic theory] of their bubble.

This article was originally published in March 2007. I wonder if its author—after viewing a DVD of the PCP-fueled performances of Kudlow and Cramer during the first week of July August 2007—would concede that the US is no longer in a state of denial about its deranged subprime mortgage market.