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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Sun Mar 18, 2007 4:51 am Post subject: US Housing Mortgage Sector Meltdown |
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With the meltdown in the sub-prime mortgage sector now laid bare, many on Wall Street desperately cling to the notion that the pain will be localized. The prevalent delusion is that the overall mortgage, housing and stock markets will be little impacted by the carnage ravaging the sub-prime sector.
As such, renewed stock market weakness is seen as an over-reaction and a great buying opportunity. These assumptions represent wishful thinking in the extreme.
Those who think that the sub-prime market is unrelated to the broader economy do not understand that the problem is not just the fiscal responsibility of marginal borrowers, but the inherent weakness of the entire U.S. economy. It's just that the sub-prime sector, being one of the most vulnerable spots, is where the problems are first surfacing.
Think of the U.S. economy as an unstable dam. The first leaks will be seen in the dam's most vulnerable spot. But there will be many more leaks to follow. Before long the entire dam will collapse. It would be a fatal mistake for those living downstream to assume a leak is an isolated event, unrelated to the integrity of the dam itself. But that is exactly what those on Wall Street are doing with respect the horrific data emanating from the sub-prime market.
The bottom line is that far too many Americas , not simply those with low credit scores, have borrowed more money then they are realistically capable of repaying. The credit boom was created by initially low adjustable rate mortgages, interest only, or negative amortization loans, and an appreciating real estate market that allowed homeowners to extract equity to help make mortgage payments. Now that real estate prices have stopped rising, and mortgage payments are resetting higher, borrowers can no longer “afford” to make these payments.
Significantly, most sub-prime loans involved low “teaser” rates that lasted for only two years. In contrast, teaser rates for most prime ARMs typically last for five years. This difference, rather than any inherent distinction in the fiscal health or credit worthiness of the borrowers, explains why the delinquencies are so much higher in the sub-prime sector.
Of course, the vast majority of home loans in the last few years, sub-prime or otherwise, should never have been made in the first place. However, when real estate prices were rising, no one cared about the wildly optimistic assumptions or the out-and-out fraud inherent in the loan process. Everyone was making money. Borrowers, regardless of their ability to pay off their loans, thought they were getting rich as real estate prices rose. On the other side, home builders, real estate agents, appraisers, mortgage brokers, mortgage originators, Wall Street brokerages that securitized the loans and the hedge fund clients who bought them, were all getting rich as a result of booming credit. For the charade to continue, borrowers pretended they could pay and lenders pretended that they would be paid.
http://www.marketoracle.co.uk/Article529.html |
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