Subprime Risks Coming Home to Roost
Having a rather intimate knowledge of this field of lending, I am not surprised at the current subprime lending industry travails. Some rather large subprime lenders, in addition to New Century Financial Corp., are going to be stretched to the breaking point.
Here’s an interesting piece written by Paul McCulley, titled The Plankton Theory Meets Minsky, which delves into why this current subprime mess is finally congealing. From McCulley’s piece.
The ongoing meltdown in the sub-prime mortgage market would not matter, except for those directly involved, except that it marks the unraveling of Ponzi finance units that, on the margin, were the plankton of the bubbling property sea of recent years. As the bubble was forming, riding on first-time homebuyers with first-time access to credit on un-creditworthy terms, and first-time speculators riding the same with visions of bigger first-time fools to take them out, all looked well. But as Minsky warned, stability is ultimately destabilizing, as those who require perpetual asset price appreciation to make book are forced to sell to make book. Such is reality presently in the U.S. residential property market, which has flipped from a sellers’ market on the wings of buyers with exotic mortgages to a buyers’ market of only the creditworthy.
The whole thing is worth a read.
Thanks for the heads up on this, Pfeif.