Both the New York Times and the LA Times have stories on the subprime meltdown. There seems to be a positive feedback loop at work now: rising default rates have led to credit tightening, and credit tightening (by making it harder for people to refinance their way out of loans whose teaser rates are about to reset) is going to further increase default rates.
Lurking in the background is another positive-feedback possibility: defaults lead to distress sales, distress sales force down prices, falling prices lead to even more defaults. Lurking behind that is the BIG positive-feedback threat: falling home prices plus a tighter market for refinancing puts a crimp in consumer spending while also depressing homebuilding, leading to an economic slowdown which further increases default rates and depresses home prices.
So far, I couldn’t buy back in to the LA housing market at a profit. But I’m glad I sold out in the summer of ’05 and get to watch this one from the sidelines. Seems safer here.
Footnote “Creative” mortgage finance seems sure to be the next big financial scandal. But the Times story has a reminder of the previous financial scandal, the one about “sell-side” securities analysis.
Why hasn’t Bear Stearns fired the analyst who was touting New Century Financial just before its lenders cut it off? Does that have anything to do with the fact that Bear Stearns was one of the outlets for mortgage-backed securities based on New Century’s loans? And if, as seems likely, New Century turns out to be insolvent, leaving the buyers of those MBS’s stuck with the bad loans New Century made, will Bear Stearns do anything to make its customers whole? No, I don’t think so, either.