> > Immigrants Hit Hard By Repossessions > The Economist of March 24, 2007 included a 3 page briefing titled "The trouble with America's Housing Market" and I think it's worth summarizing here because the economic fallout from this "collapse" in the sub-prime lending market has uncertain consequences for the US (and world) economy as a whole.
As the housing market has slowed any new growth in sales has been to poorer Americans or sub-prime borrowers. They joined the "housing-market party" late so prices were already "sky-high". They were encouraged to take out loans by brokers more concerned about fees than buyers ability to repay debts. Self-certification mortgages (undocumented "liar loans") and interest only loans have become more common in this cooling market. Lenders who advanced the money underestimated the rate of default. This failure of judgement is caused somewhat by a complacency due to the success of high yielding mortgage backed securitization and its derivatives. "Knowing that loans could be lumped together and sold, and then chopped, repackaged and sold again, made for slack judgement". At the extreme end, new landlords who think a bunch of houses will be their pension have stretched their budgets. The Economist referred to Casey Serin a 24 year old web designer who bought 7 houses in 5 months. He lied about his income on no document loans and was never asked for a deposit. 3 of the houses have been repossesed and he now has debts of over $2 million. To put the figures in context though, 1 in 8 borrowers are behind on their payments (as of March 2007) and while hundreds of thousands are in danger of being thrown out of their houses, the economic damage is estimated at $97 million, which is a small fraction in a $40 trillion market for debt. Most Americans who borrow money to buy houses manage. But the Economist doubts the wisdom of tax breaks to encourage home ownership and is crtitical of "the American fetishization of home ownership". Clearly the "democratization of credit" referred to by former Federal Reserve Chairman Alan Greenspan, has some dangers, and how far this debt risk stretches through the broader economy is somewhat disconcerting. There is also little room for policy makers to lower interest rates due to rising inflationary pressures. In fact it could be argued that the lowering of interest rates in the wake of the dotcom bubble burst has led to these troubles in the housing market, and the hunt for higher yields in riskier debt leveraged investments generally. Graham. _______________________________________________ Post Messages to: [email protected] Subscription Maintenance: http://leafe.com/mailman/listinfo/profox OT-free version of this list: http://leafe.com/mailman/listinfo/profoxtech Searchable Archive: http://leafe.com/archives/search/profox This message: http://leafe.com/archives/byMID/profox/[EMAIL PROTECTED] ** All postings, unless explicitly stated otherwise, are the opinions of the author, and do not constitute legal or medical advice. This statement is added to the messages for those lawyers who are too stupid to see the obvious.
