The markets let out a big hoorah on Friday. But how, exactly, is a lower discount rate going to solve the problem? In October of this year, the big hump in mortgage resets comes – with more than US$50 billion in mortgages to be adjusted upwards. Then, next year another half a trillion in mortgages is to be reset, with the final peak coming in March.
The typical subprime borrower from 2004-2006 will have to come up with about US$400 per month more. Where will he get the money? Who will lend to him? And why would he borrow?
If you think the rate of foreclosures is up now – just wait until October. And it won’t just effect those subprime borrowers. Unfortunately, you could be the best homeowner in the world…maybe you’ve even paid off your mortgage… but if there is a foreclosure near your house, it could lower the value – by up to US$20,000!
Yes, we’re all believers in the Theology of Capitalism now. That is, we don’t think we have to look too deeply into the Holy Mysteries that surround modern markets. The place is full of miracles; that is all we need to know.
But when it comes to real, free-market capitalism, we are all agnostic. People think that central banks can collude to manipulate the markets…and thereby avoid a much-needed correction forever. Our guess is that investors will pay dearly for the delusion.
“The world is flat after all,” a friend wrote us, sending the following item:
“Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan (US$396.2 billion) of mortgage lending.
“‘The quality of housing loans are much worse than the subprime loans in the United States,’ Yi was quoted as saying by the South China Morning Post.
“At least there has been a credit check system (in the United States) but in China anyone can borrow money to buy a house.”
See, dear reader. Americans aren’t the only ones. Now, everyone can take part in foolish trends and fads.
Markets and Money