2007_03_31 — “Volatility, fear, and bad news regarding subprime mortgages”

Volatility, fear, and bad news regarding subprime mortgages

More volatility, fear, and bad news regarding subprime mortgages continued to rattle US markets. For much of the past three years, pundits had split opinions regarding whether rising home and oil prices would effect core inflation. They never did. Now, the question du jour is if housing and mortgage market problems will dampen the broad economy. Current studies indicate that although a sizeable percent of recently issued mortgages may end in foreclosure and unfortunately a large number of people will lose their homes, the overall loss to lenders and investors will be small once the properties are resold. Easy credit facilitated the housing boom and concurrent run-up in prices. With the current subprime collapse and increase in delinquencies, we have already entered into a corrective phase — with declining prices, rising inventories and higher credit standards — that may be over by late 2007 or in 2008. The climbing delinquency rates are scaring the market, but Fed Chairman Ben Bernanke, as well as various law makers, will probably take steps to prevent a wholesale collapse in housing prices. Ironically, because the Fed would never tighten credit during a financial crisis, the mortgage predicament may end fears of higher Fed interest rates and in that way be a positive sign for the markets.

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Michael Ashley Schulman

Michael Ashley Schulman

Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm