Tuesday, March 11, 2008

Of Homeowners and Hedge Funds

"As home prices plumment, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners--those who can afford to pay their mortgages but have decided not to--are starting to walk away from their homes. ... A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort. ... Also, many borrowers who bought in recent years have put down little if any equity. 'If they haven't lived in [the home] very long and haven't put any cash into it, it's a lot easier to walk away,' says Chris Mayer. director of the Milstein Center for Real Estate at Columbia Business School", WSJ, 29 February 2008.

"The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. ... But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets. ... A bank might lend 97 cents against the collateral of a high-quality mortgage security with a market value of $1", WSJ, 7 March 2008.

3% "margin" for a 'high-quality mortgage security"? A whaaaat? The Mogambu Guru would say, "Hahahahah". Are the banks this stupid? The most interesting thing in these articles was their titles: "Borrowers Abandon Mortgages as Price Drop" and "Hedge Funds Squeezed by Tough Lenders". The WSJ's message: homeowners bad, hedge funds good. The WSJ's thinking is like that in George Orwell's Animal Farm, in which all the animals were equal except some, the pigs, which were more equal than others.

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