Arizona Real Estate Notebook

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• 1 Brian McMorris // Aug 16, 2007 at 9:06 pm

  As much as I love Ben Stein, I have to disagree. The sub-prime / Alt-A mess is not so much about the actual number of defaulting mortgages, but is more about how the whole financial process enabling and encouraging such mortgages has eroded the confidence of the global (not just the US) financial system (see BNP Paribas for a global example). The sub-prime mess is compounded and amplified by the leverage used by hedge funds investing in packaged mortgages and loans as CDOs or RMBSs. It is the default of these highly leveraged instruments that is freezing up the market. And bad loans weren’t made just for sub-prime residential mortgages, but also for overly leveraged corporate buyouts.

  If the mortgage market remains frozen, the overbuilt housing market will not get sold off at any price, as prospective buyers will not be able to obtain financing.

  I am guessing that the central banks around the world won’t let this nightmare scenario occur. They can inject money into the banking system and “re-liquify” the international money market, at the potential cost of increased inflation. Lowering interest rates would not help directly (rates aren’t the problem), but it would signal the intention of the central banks to not let the planet slip into a global recession or worse. There were some signs of this liquidty activity today, but we won’t know for sure how this plays out for another few months to a couple years.

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