Rick Reuben wrote:Are you saying that people bundled up these mortgages and made bets on the yields they would bring, but that they never had real value??
No, what I mean is that CDOs etc. are one set of funds in which banks, hedge funds, etc. invest. And parts of those funds involve bundled mortgages, and only some of those mortgages are subprime, and only part of those subprime mortgages are going bad.
Some failed funds (the big Bear Stearns ones come to mind) failed b/c they were long weak loans, outright, and they just straight got fucked. These are the guys to which you can apply a direct correlation between defaults and their demise.
Plenty of other funds are in trouble b/c they have leveraged against their assets, and their assets are in danger of disappearing b/c their investors are freaking out. These are the guys that are going to get stampeded in the rush for the exits.
Ahh, but see- if you know that, then we all know that. And that means that potential buyers will wait and see if they can't do better in six months or another six months- and that means that the backlog of supply in the housing market increases, causing sellers to drop prices even more, and that, in turn, encourages more buyers to wait them out. AND, when those house prices drop to find buyers, guess who else gets hurt? All those people facing foreclosure and trying to make a short sale- the value of their house falls because the market slides for all houses.
And, if people wait to buy, that means banks are not selling the number of mortgages they were, and that puts increasing pressure on them to dump their nonproducing mortgages, which means banks will push for foreclosure harder!
Hey, I see this snowballing for a good 18 months more. We'll see.
It could last anywhere from four months to two years, from what I have read that makes sense to me.
I'm not diminishing the importance of what is happening--it's a big deal. I'm just quibbling with the notion that it's driven by a fundamental problem with foreclosures as opposed to panic. And don't get me wrong--if I was long housing or anything related to housing right now as a short-term speculative investment, I would get out as surely as everyone else wants out. But I'm not going to sell stocks, and I'm not going to disturb any longer-term investments that I have. I just sold a house, and I was dug in for the long haul, b/c I had to be (fortunately, it wasn't required).
One other thing: I don't think banks will push harder for foreclosure--banks hate to foreclose. More likely, they will move to restructure shitty loans, almost as aggressively as those loans were made in the first place.
There's some talk now of Countrywide going tits up, which would be in part b/c of bad loans, and in part b/c of lower housing demand. That would indeed be massive.
