There is still an enormous number of subprime and stated income loan programs available for people with low credit scores and few assets. Only the programs for the most marginal borrowers have been taken from the market. And new creative programs have been introduced to fill the temporary void at startling speed. It has truly been a marvel to behold.

Far from being the contagion I was expecting, the mortgage markets and residential real estate markets have not only absorbed this shock but are exhibiting signs of even greater confidence and liquidity now that the underlying concerns about fraud and irrational underwriting in the mortgage markets and loose appraisals of collateral have been acknowledged.

There will still be more headlines but those unscrupulous players not already knocked out are quickly being isolated from participating by the mbs markets. Underwriting to exact specifications for each loan program has returned following the sloppy underwriting that was at the heart of the real problem in the mbs market.

This tension release and resulting rapid tightening up of the industry appears to have worked amazingly well and amazingly quickly.

Charles Sorkin writes: 

Just throwing this notion out there, but is it accurate to say that "home-ownership for all Americans" is a stable economic regime? For instance, jobs for all Americans (i.e. 0% unemployment) is widely considered unstable, and would lead to sporadic regional labor shortages and is associated with inflation pressure.

Is there a NAIRH (non accelerating instability rate of homeownership) associated with the American economy, much like the much-debated NAIRU concept?

An insightful reference to housing stock, homeownership, and the means of financing it, are referenced in Paul McCulley's monthly commentary on the Pimco website.

Ken Smith writes: 

The next step in America will be to follow Britian which in the period 1979 through 1997 converted municipal housing to ownership housing. Well over a million former tenants became homeowners.

This was the era of privatization. In 1979 British government institutions owned much or all of coal, steel, gas, electricity, water, railways, airlines, telecommunications, nuclear power and shipbuilding, and had a significant stake in oil, banking, shipping and road haulage.

The agencies responsible for these changes were called Next Step Agencies. So the next step in America is conversion of municipal housing to private ownership by individuals or corporations.

The Bush Administration has voiced, many times, the goal of home ownership for all Americans. It appears the goal is to implement this program without regard to ability to pay. I can see a way to profit from this. Get the loan without ability to pay, peddle the property for an appreciated value, pay off the loan and keep the difference. Do another flip, and another.

So what happens when everything falls apart? When jobs are lost, as in Illinois, Ohio, and other hard hit states? Nothing bad happens. Since anyone can get a property without income then anyone can pay up for the property being flipped. So another person steps in, without income, to purchase property that has been appreciated by an appraiser willing to be part of the game, for compensation, of course.

Is this magical thinking? Is this reason? Is this logic? Is this traditional? Is this paradise? Is this the new economy? Is this a bubble?


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