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11/26/07
Mortgage giants - Fannie and Freddie, now admit to feeling the pain“Until a few weeks ago it had been assumed that Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that tower over America’s $11 trillion mortgage market, could survive the storm with at worst a few bruises.” That script is now being dramatically rewritten.
Banks’ capital needsThe only thing bankers can have felt grateful for this Thanksgiving was a rest. Confidence in subprime-related mortgage products continues to fall. Rating agencies are slashing collateralised-debt obligations (CDOs) faster than you can slaughter turkeys. Another $108 billion-worth of losses on subprime CDOs have yet to surface.
Tightening Bank Credit “Lenders, reeling from rising defaults and foreclosures of home loans, are being stricter about lending. They are also asking for higher ‘risk premiums,’ (the amount above Treasury rates that borrowers have to pay to compensate for the risk that the loan won’t be completely repaid) even from the best borrowers.” Refinancing May Be Harder to Enjoy While Rates are Down, Lenders Tighten Rules; Savings Prove Slender.
The Subprime mortgage crisis is poised to get much worse.“Next year, interest rates are set to rise — or “reset” — on $362 billion worth of adjustable-rate subprime mortgages….$152 billion of other loans with adjustable rates are set to reset” “Falling home prices mean that many borrowers have little or no equity in their home, making it tougher for them to get out from under their loans.”“The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes.”“The big concern is a vicious cycle in which foreclosures push down home prices, making it m ore difficult for borrowers to refinance and causing more defaults and foreclosures.” Rising Rates to Worsen Subprime Mess Interest Payments Set To Grow on $362 Billion In Mortgages in 2008.
Subprime lending relied more on models than judgementAccording to Kenneth Rogoff, an economist at Harvard who has long attempted to find rational models for predicting currency fluctuations, “it is stunning how hard it is to explain movements in exchange rates.” All the models based on rational expectations now say that, on fundamentals, the euro is overvalued against the dollar, he reckons. But does that mean the dollar will soon rise? Mr Rogoff says he has no idea. In rational-expectations theory, a range of variables including inflation, interest rates and growth should have a predictable impact on currency movements, but in practice this theory has proved less useful for forecasting than tossing a coin. In contrast to using experience and judgement, underwriting ”subprime-related securities…could only use mathematical models…’they had no experience, no intuition, no entrepreneur,’” says Roman Frydman, New York University economist. Economics focus.
S&P says distressed-debt count rises, but light at the end of the Tunnel.
Filed under: Bank Credit, Economy
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