Calculated Risk: NY Times: Who Bears the Risk?

リンク: Calculated Risk: NY Times: Who Bears the Risk?.

NY Times: Who Bears the Risk?

The NY Times asks: Who Bears the Risk?

The housing boom would never have lasted as long as it did if mortgage lenders had to worry about being paid back in full. But instead of relying on borrowers to repay, most lenders quickly sell the loans ...

As the boom thundered on, the pool of available credit grew larger than the pool of creditworthy borrowers, resulting in an explosion of risky mortgages with features like no money down, interest-only payments and super-low teaser rates. Investors ... currently hold $2 trillion in mortgage-backed securities from investment banks, triple the amount from three years ago. Investors also own $4 trillion in mortgage-backed securities from government-sponsored agencies.

... everyone knows that if mortgage defaults should rise, damage could reverberate throughout the financial system. So far, defaults have inched up. But many homeowners are at a dangerous juncture. Interest rates on adjustable mortgages are rising as home values are weakening, precluding for many the chance to refinance. Economists calculate that $750 billion of outstanding mortgage debt is now at measurable risk of default — about 7 percent of the total.

Of those us that thought there was a housing bubble, Dr. Hamilton asked last year: If there is a housing bubble, "[W]hy are banks making loans to people who aren't going to be able to pay them back?"

This is a great question, and the NY Times hints at a possible answer. "In a market so vast and dynamic" it is possible that numerous participants are underestimating the systemic risk.

Hopefully Tanta can chime in here - she understands this market far better than I can ever hope to - I'll post her comments in full.

But I am reminded of this quote:

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."

John Maynard Keynes, "Consequences to the Banks of a Collapse in Money Values", 1931