Few Saw Mortgage Storm Brewing

It’s hard to believe now, but at the start of 2007 few people outside the mortgage industry knew or cared what a subprime loan was.

Fewer still had any inclination of the far-reaching impact these loans would have on the global economy during the next 12 months.

Nevertheless, the fallout from the collapse of the market for subprime loans -- loans made to people with poor credit histories -- became without question the most significant story on Wall Street in 2007.

“The severity and sudden onset of the crisis caught people off guard,” said Mike Larson, a real estate analyst with Weiss Research in Jupiter, Fla.

Larson said the writing was on the wall as 2006 wound down. Signs of a pending storm included reports of overbuilding by homebuilders, rising inventories of existing homes for sale, and, most ominously, perhaps, a jump in mortgage delinquencies.

“There were clearly problems in ’06,” Larson noted, “but in ‘07 it exploded into the mainstream. Very few people realized the depth and severity of the downturn we were headed into.”

The cracks began to show in February. European banking giant HSBC Holdings, a big investor in securities backed subprime loans, said it needed to set aside billions more than previously expected to offset losses in its subprime investments. This would become a trend.

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