Adjustable-loan borrowers are the big losers

Part 3 of 5: Upheaval in the subprime market

(This is Part 3 of a five-part series. See Part 1, Part 2, Part 4 and Part 5.) In the first two articles in this series, I explained the immediate cause of turmoil in the subprime market as the ending of house-price appreciation, and the underlying cause as a myopic tendency for lenders to make loans that worked only if house prices continually rose. This article focuses on the current state of the market. The Current Pain: The 32-odd subprime lenders who failed have garnered the least sympathy. Put simply, they gambled and lost. But some borrowers fall in that category as well because they were looking to profit from house-price appreciation. Instead, they are facing foreclosure. Investors in securities issued against pools of subprime mortgages have also felt pain, as the market value of these securities has declined. Lehman Brothers estimates the decline at $19 billion. Most of it is concentrated among the riskiest of the securities, which promised the highest yields. (No colle...