by Calculated Risk on 8/04/2008 02:11:00 PM

From Jon Birger at Fortune: The woman who called Wall Street's meltdown A few excerpts:

Whereas her peers keep searching for some sort of light at the end of the tunnel, Whitney thinks the tunnel is about to collapse.
...
"What's ahead is much more severe than what we've seen so far," she warns a standing-room-only crowd of money managers at a May lunch meeting. Once she gets rolling, Whitney morphs into a kind of dark sage ... When one shell-shocked lunchgoer presses Whitney for a glimmer of hope, she has none to offer. Asked by another money manager whether she has any doubts, Whitney concedes only one: "While my loss estimates are much more severe than those of my peers, my biggest concern is that they're way too low." That was May. By mid-July, bank stocks were down another 20%.
...
Her bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate to 69% from the more natural level of 64%.

A lot of the new homeowners were in over their heads. They'd put little or no money down and thus had little incentive - and often little ability - to keep making their monthly payments when home prices started to fall and their teaser rates got bumped up. "Low equity positions in their homes, high revolving-debt balances, and high commodity prices make for the ingredients of a credit implosion, particularly at this point in the consumer cycle," Whitney wrote. That report didn't turn her into a star - though it should have - but it did land her an invitation to present her findings to the FDIC.

Whitney may have been the first Wall Street analyst to "sound the alarm loudly about subprime mortgages", but there were others that had it right long before October 2005. Dean Baker comes to mind. Tanta of course. And many others.

And on the homeownership rate: According to the Census Bureau, the homeownership rate is now back to the levels of the summer of 2001. (see graph).

A research paper last year from Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf (Sep 2007), "Accounting for Changes in the Homeownership Rate", Federal Reserve Bank of Atlanta - suggests that there were two main factors for the recent increase in homeownership rate: 1) mortgage innovation, and 2) demographic factors (a larger percentage of older people own homes, and America is aging).

Click on graph for larger image in new window.

Note: graph starts at 60% to better show the change.

The authors found that mortgage innovation accounted for between 56 and 70 percent of the recent increase in homeownership rate, and that demographic factors accounted for 16 to 31 percent. Not all innovation is going away (securitization and some smaller downpayment programs will stay), and the population is still aging, so the homeownership rate will probably only decline to 66% or 67% - not all the way to 64%.

I think she may be too bearish, but overall I think Ms. Whitney has done an excellent job.