Crisis Looms in Market for Mortgages - New York Times
The mortgage securities market accounts for $6.5 trillion, more than the Treasuries market. Credit derivatives and the sale of debt is complex and under regulated. With more and more focus now on the sub prime credit market it is going to be exciting, though hopefully not disastrous, to watch. A down turn in home prices would reduce the liquidity in the market and surly default rates would rise.
Hard to wrap your arms around the context that the mortgage/credit derivatives market operates with respect to everything else, but to me it seems like the foundation of our economy, how both individuals and business buy and sell REAL estate, and the leverage other peoples money to innovate in business.
As the Congress tackles this, with more regulatory oversight, the article suggests the sector is going to get something akin to Sarbanes-Oxley. The sub prime market is interesting, and unrecognizable, a mortgage broker makes a simple matter of a "stated income" or "no-doc" loan, that is, you tell the bank how much you made instead of having to prove it. The industry apparently calls these "liar loans," but it makes sense if you are a bank and you have got money to loan, and you can let a little white lie slide in exchange for a higher interest rate.
The article further discusses how the prices of the credit derivatives are set, that is, how does one company sell debt (financed money) to another company. Essentially, the lender can upgrade of downgrade that debt, and nothing is marked to book until the debt settles of a up/downgrade occurs, so how quick will folks (banks, lenders, related service companies) be to "admit" by way of grading, the value of the product/note/derivative/etc.? And that is where the regulation comes in.
Big ideas, but I see the personal take away being a slowing sellers market, thereby a better place for buyers (having to finance more traditionally, e.g. less or much more expensive interest only, 20% down, etc.), and things are good for landlords taking in folks who want to live in a place they cant afford to buy. You can't help but assume home prices will flatten for awhile as the market adjusts to more conservative opportunities in real estate. Worth a continued watch of mortgage and credit based news, and more education it how such products are bought, sold and settled.
