|
Junkie
|
[QUOTE=host]
Here is an article from WSJ.
http://online.wsj.com/article/SB1173..._whats_news_us
Quote:
NEW YORK -- As more financially stretched homeowners renege on their debts, and mortgage lenders go under by the dozen, economists are surprisingly sanguine about the broader economy's ability to weather the storm. But they add a big caveat: Much depends on how investors react to an increasing wave of worrying news, and how much some homeowners' difficulties aggravate the nation's deep housing slump.
By all accounts, the market for "subprime" mortgages -- home loans made to people with poor or sketchy credit histories -- has unraveled with impressive speed and intensity. In some parts of California, the proportion of seriously delinquent subprime loans has quadrupled in the past year to about one in eight, according to data provider First American LoanPerformance. In the past month, subprime lenders have run into serious trouble or shut their doors at a rate of about two a week.
The stock prices of Wall Street investment banks have gyrated amid concerns some big financial firms could find themselves exposed -- fallout that could further spook investors and trigger a new bout of selling in stock and bond markets.
So far, though, many economists -- including Federal Reserve Chairman Ben Bernanke -- haven't changed their forecasts as a result of the subprime troubles. Some see the sharp rise in defaults among riskier borrowers as a natural, albeit acute, symptom of the housing slump that began in late 2005, rather than a separate ailment in itself. With house prices falling, consumers who got no-money-down mortgages with the help of loose lending standards, have little to lose by walking away from their homes and debts.
"No doubt some of the worst practices of the housing boom are going to yield some payback," says Steve Wieting, senior U.S. economist at Citigroup in New York. "But it's not large enough to derail an otherwise healthy economy."
He expects inflation-adjusted gross domestic product, a broad measure of the nation's economic activity, to expand 2.6% this year, slower than normal but well short of a recession.
The main reason for economists' equanimity: Those who took out subprime loans tend to be less-affluent consumers who make up a relatively small share of consumer spending, the most important driver of the U.S. economy. Labor Department data show that the fifth of U.S. households with the lowest incomes account for about 8% of all consumer outlays, while the most-affluent fifth accounts for nearly 40% of spending.
Meanwhile, the unemployment rate remains relatively low and incomes have been rising, suggesting poorer people have some resources to spend, even if they can't afford their homes and can't borrow money.
[chart]
That said, the subprime mess has added some risks. The possibility economists fret about most is that investors and lenders will react to rising defaults by pulling back from all kinds of borrowers, good and bad -- the sort of "credit crunch" that has triggered recessions in the past.
"One of the things to worry about is how much markets are worrying," says Andrew Tilton, senior U.S. economist at Goldman Sachs in New York. "A contagion in the credit markets based on fear is a possibility, though we don't think that's the most likely scenario."
In the past few weeks, investors have become more wary of lending to risky borrowers. The annual cost of default insurance on $10 million in riskier bonds backed by commercial real-estate loans stands at about $9,600, up from less than $6,000 before the stock-market plunge of Feb. 27. Bonds issued by companies with shakier finances -- known as "junk" bonds -- yield nearly 2.8 percentage points more than comparable Treasury bonds. That gap stood at 2.5 percentage points Feb. 22.
Most consumers and businesses, though, still have access to money. U.S. companies have issued billions of dollars in junk bonds in the past few weeks, despite higher borrowing rates. The subprime problems haven't had a major effect on auto lenders.
"It's hard to make the argument that weakness in the subprime mortgage market will have an effect on auto subprime loans," says Hylton Heard, director of asset-backed securities for autos at Fitch Ratings, a credit-rating firm. "They're two different assets."
For one thing, it is quicker and easier to repossess a car than to foreclose a mortgage. That suggests people would be more likely to keep up their car payments so they can get to jobs that help them pay their other bills.
Still, the pullback in credit for subprime-mortgage borrowers could have a meaningful effect on its own. As some potential home buyers find it harder to get money and more bad loans beget more foreclosures, the decreased demand and increased supply of homes could depress prices, deepening the housing slump.
Ethan Harris, chief U.S. economist at Lehman Brothersin New York, estimates foreclosures in the subprime market could bring an additional 15,000 to 20,000 homes on to the U.S. market every month starting next year.
The pain could be particularly acute in frothy markets such as California and Florida, and in depressed places such as parts of Ohio and the auto-producing areas of Michigan. In some areas in and around Detroit, Cleveland and Atlanta, subprime loans make up more than half of all mortgage loans outstanding, according to First American LoanPerformance.
"In some of these regions you could have a pretty tough environment, in which a bad local economy, tightening credit and weakening home prices all kind of reinforce each other," says Mr. Harris
|
Now what?
Lets clarify the issue in question. Can you state your premise - in one paragraph.
__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."
Last edited by aceventura3; 03-12-2007 at 10:45 AM..
|