March 11th, 2007


Very good article on the housing market and mortgage-backed securities.

In the Sunday NYT.

The one piece that's missing -- the piece that makes clear why some of the pessimists are worried about the "cascading bankruptcies" scenario, where the initial round of defaults, and the number of homes put on the market under distress, causes prices to fall while rates rise, raising other folks' payments and thus causing more distress sales and bankruptcies -- is the huge percentage of the housing-market debt that's at adjustable rates. How huge? Try 80% of the subprime segment (according to the WSJ). Predatory lending (where the lenders should have known that the recipient couldn't afford the debt) has created a risk of kicking off a serious decline in housing values nationwide; and the adjustment in bankruptcy laws that was passed a few years back is going to protect them from paying much of a price for it, unless the new Congress decides to change the rules again.

The burning question, though, is whether such a cascade would jump from the subprime segment to the upper middle class, who are pretty darn leveraged at this point, between mortgages and equity loans. I think ARMs plus Interest-Onlys make up somewhere between a quarter and a third of the total mortgage market, and closer to half in CA.

I'm glad none of my investments are directly tied to real-estate or mortgages...

ETA: Daniel Gross on a similar topic.
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