Housing Market Crash

Posted by ZZ Bachman...

Hold on to your seats folks. You ain’t seen nothin’ yet !!

California-based Accredited Home Lenders says that it would stop writing new loans and lay off more than half its workforce. Lehman Brothers is shuttering its BNC Mortgage unit. And Quality Home Loans has joined about a dozen mortgage companies in filing for bankruptcy.

Subprime losses also might foreshadow losses on other new securities. Some of these bundle other loans: auto loans, credit card loans, business loans. In 2006, issuance of all these “asset-backed securities” totaled $748 billion, says Moody’s Investors Service. Other securities perform more exotic tasks. “Credit default swaps” in effect provide insurance against losses on loans (one party pays the other to cover specific losses if they occur).

In theory, all this diversifies risk; in practice, it may disguise risk.

Companies that approve loans (”originators”) often don’t hold them. Loan standards may slip because originators get paid on volume. “The originator has less reason to worry about loan performance down the line,” says economist Joseph Mason of Drexel University. Rating agencies such as Moody’s and Standard & Poor’s evaluate creditworthiness. But the task is gargantuan and global in scale. Moody’s rates 100 nations, 12,000 corporations, 29,000 governmental units and more than 96,000 debt securities. Economist Charles Calomiris of Columbia University worries that agencies may subtly relax ratings because the more securities that are issued, the more the rating agencies make.

The verdict on the new order is unsettled. No one really understands its Byzantine ways. “It has become so complex and so arcane,” former Fed chairman Alan Greenspan said recently, that it is “swamping” governments’ regulatory controls. Yet, it “seemingly works because there is an implicit, invisible hand which creates . . . smoothness.” Most markets, he said, self-regulate. That’s reassuring — up to a point.

Greed and fear are not always self-correcting. If foreign and domestic investors lose confidence, who knows what might happen? Credit might become scarcer as they retreat to safe securities. Interest rates might rise. A panic is conceivable. The biggest upsets “come out of left field,” Greenspan noted. “We never anticipate.” – Robert Samuelson

Posted by ZZ Bachman...

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