The New York Times (see here and here) is not the only major metropolitan newspaper that employs a business columnist who doesn’t appreciate the benefits of a robust market in mortgage financing.
Channeling the Times’ Gretchen Morgenson, the Chronicle’s Loren Steffy decries the irresponsibility of those involved in the overheated subprime mortgage market. In so doing, he passes along an anecdote on how he resisted the temptation to take out a subprime mortgage to finance a home in Houston before he had sold his home in Dallas. Steffy suggests that he has financial discipline that both the subprime lending industry and most of the subprime borrowers lack. Maybe so, but what is clearer is that he doesn’t appreciate the benefit to him and other consumers of risk-taking in the subprime mortgage financing market.
Sure, there were a substantial number of people who took out subprime mortgages who didn’t have the financial capacity to pay them. A large number of those folks will default on their mortgages and lose their homes, which is unfortunate. However, the bigger losers will be the holders of the equity tranches of mortgage-backed securities (“MBS’s”) and subprime originators who are now left holding the bag with mortgages that they can’t sell. Don’t feel too sorry for them, though. Given that those investors made a lot of hay during the boom years, they are now simply enduring the risk of relaxing underwriting standards too much in an attempt to sustain the hot market. These are sophisticated investors and financial institutions that are willing and able to take the risks of these investments and to bear the losses associated with such risks.
Going forward, the number of subprime mortgages originated will go down, as will the number of subprime MSB’s sold into the market. Yields on the subprime MBS’s will likely rise and the underwriting standards will get stricter, so the supply of subprime mortgages will constrict to meet the reduced demand. The MBS’s and other financial products that have been developed to hedge risk in the subprime market are valuable tools to facilitate such a correction.
Which brings us back to Steffy. Perhaps he is more financially disciplined than those involved in the subprime mortgage market. Or perhaps he is has the same aversion to risk as Suze Orman. Whatever the reason, he decided not to take the risk of carrying two mortgages, which is fine. But another homeowner in the same position as he was might decide that taking on the subprime mortgage was worth the risk, which is fine, too.
The point is that the financing market for subprime mortgages gave Steffy a choice to engage in what could have been wealth-creating risk-taking. Nothing is wrong with electing not to take that risk. But it is wrong not to acknowledge that it is a good thing to have the opportunity to make that choice, which is what the subprime mortgage financing market provided.

Over the past weekend, the New York Times business columnist Gretchen Morgenson continued her “sky is falling” bit with the regard to the subprime mortgage market (see prior post here). Larry Ribstein, who used to disassemble Morgenson’s columns on a weekly basis before tiring of it, somehow musters the energy to expose Morgenson’s vacuous analysis once again, which saves the rest of us from having to muck through her blather.
Nevertheless, it is rather shocking that a Pulitizer Prize-winning business columnist doesn’t take the time to understand that an equity investment in a company that originates subprime mortgages is very different from an investment in debt that is secured by pools of subprime mortgages (mortage-backed securities or “MBS’s”), which are designed to endure a temporary drop in house prices or rise in default rates. Consequently, while Morgenson wrings her hands over the fact that investing in subprime mortgage originators hasn’t been a good idea for the past year, she can’t explain why this means that the markets in subprime MBS’s are in serious trouble. The reality is that they probably aren’t.
But then again, maybe Morgenson doesn’t even understand the equity markets all that well. According to this NY Post article, Morgenson’s story mischaracterized the Bear Stearns recommendations on one of those nefarious subprime originators:

Bear Stearns is claiming that one of its analysts was done wrong in a scathing New York Times analysis of the collapsing subprime mortgage industry.
Bear analyst Scott Coren was described as having written “an upbeat report” about a collapsing subprime mortgage lender, New Century Financial, a company considered to be just days away from bankruptcy.
The article, written by Pulitzer prize-winning columnist Gretchen Morgenson, chronicled in a Page One article how Wall Street willingly created a burgeoning market for bonds-backed loans that were virtually certain to have trouble making their principal and interest payments. Coren, who upgraded his call on New Century on March 1, appeared to be portrayed in a conflict of interest to rival that of the notorious Internet bubble era.
But, in fact, Coren had made a series of gutsy calls on the subprime mortgage sector – no mean feat at Bear Stearns, a firm that in recent years has earned hundreds of millions of dollars annually from mortgage trading.
He put out a “sell”- called an “underperform” at Bear – when New Century stock was at $38 and maintained it until it slumped to $15.
Even Coren’s upgrade on March 1, when New Century was clearly beginning to collapse, advised investors to “stay on the sideline.”

Better rethink that conspiracy, Gretchen.