 Quote:
Originally Posted by twaddle
The problems extend well beyond subprime. I think it was Bill Gross who used a plankton analogy for subprime. Once the plankton dies, the entire ecosystem is affected. The subprime lenders are already dead. The Alt-A lenders are near death. Even the GSE's are hurting. They need to raise capital to meet their capital requirements, and that new capital is expensive in this environment.
But those are all first- and second-order effects. As brewer points out, an extended credit crunch would choke the economy. And combine that with depressed consumer demand, and you have a potentially lethal combo.
If a large number of ARMs were allowed to reset, there would be an increased default rate. Most of the current focus is on the new wave of bank write-offs that would lead to.
But that would also dump a bunch of REO inventory on an already saturated market. That would drive down prices for everybody, and we could start to see lots of "prime" mortgages upsidedown. This thing goes all the way up the food chain.
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But here is my problem with any 'bailout'.... why doesn't the bank or other entity give the borrower a break IF IT IS IN THEIR INTEREST.... I mean, if I had lent you money at 5% and you could not pay 7%... then can we agree on 6%? Could you still pay? If not, then maybe you can continue at 5%... I would rather have a 5% interest rate than a repoed house..
And since I made the loan (or bought it), then I should be the one to suffer my bad decision..
Some of the problem is that home prices had gone up at a higher rate than they should have BECAUSE OF CHEAP MONEY... and now the home prices have to correct back to where they should be... but will not if there is a bail out... so to me it is just kicking the can down the road... the correction will happen eventually...
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