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March 22, 2007

More on Mortgages

Michael Blowhard writes:

Dear Blowhards --

* FvBlowhard points out a hilarious website called The Mortgage Lender Implode-O-Meter.

* Alex Tabarrok attacks the "credit snobs."



posted by Michael at March 22, 2007


Just a mini-lesson in commercial finance: banks lend funds to many different kinds of borrowers, including people taking on sub-prime mortgages. Banks obtain these funds which they lend from two sources: they borrow them and they also have received money from their equity holders. One of the things that makes banks such sophisticated businesses to run is that the money they lend out is far greater than this money from their equity holders. When they incur losses on these loans (such as when mortgage borrowers default), the equity holders take the hit. (Unless the bank becomes bankrupt in which case the firms which lent money to the banks begin to suffer damage as well.) Right now, the financial sector in the US is extremely well provisioned for in terms of equity by historical standards. The impact on the financial sector of unusually high defaults by mortgage-holders is a complicated subject but I wanted to provide that mini-introduction for free so too many of you won't read Kunstler and Roubini and the like and conclude we are in some sort of a crisis.

Posted by: jult52 on March 22, 2007 1:31 PM

JT -- Always good to learn from those who know, many thanks.

Posted by: Michael Blowhard on March 22, 2007 1:39 PM

I just thought anybody who came up with a title as good as "Implode-O-Meter" should get some kind of recognition.

As regards Jult's point, it hardly matters about lender equity; the government more or less explicitly stands behind the larger actors in the financial space. If the money center banks are in trouble, a way will be found to prop them up. (A way was certainly found for the S&Ls in the 1980s and for the money center banks in the early 1990s). Of course, this government backing constitutes a "moral hazard" to the sector. This moral hazard is well illustrated by the lending practices of the subprime mortgage market (who are both directly and indirectly linked to the big boys). Of course, the little guys will be allowed to pay a price their bigger colleagues will never face.

Posted by: Friedrich von Blowhard on March 22, 2007 2:02 PM

"Of course, this government backing constitutes a "moral hazard" to the sector."

Dead on, FvB. I'm convinced everyone in the chain (except perhaps the borrower, but sometimes them too) knew that these mortgages would fail, and wanted to take the money and run. The bigger players taking on the debt figured I think that there would be some kind of bailout.

Posted by: MQ on March 26, 2007 6:01 PM

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