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"We are still quite early in the life of this crisis...."

Posted by: Peter Coy on September 10, 2007

Karen Weaver.jpgMaybe it’s American can-do spirit, or maybe it’s just a refusal to face reality, but many people seem to think that if we all work really hard we can stop people from losing their money and losing their homes in the housing meltdown.

Karen Weaver, a research analyst at Deutsche Bank Securities Inc., has a more practical point of view, I think. Here’s what she, along with Deutsche Bank colleagues Katie Reeves and Art Frank, wrote in a Sept. 7 report:

“Unfortunately, the subprime problem, by its very nature, will play out over many quarters if not years. We are still quite early in the life of this crisis. As the months wear on, we will have more and more borrowers’ loans reset from their low, teased rates, and more and more of them will not be able to make their new payment and will [choose] or be forced to leave their homes. Meanwhile, today’s credit crunch is yet to be fully reflected in home prices.”

So things are going to get worse. And Weaver argues that there’s no good way to relieve the pain:

“We believe that there is little that can (or frankly should) be done about existing subprime borrowers who took out very risky mortgages at the peak of home prices. There is no precedent for that type of ‘bailout’ and it would be both wildly expensive an, in our view, misguided. We expect that most of the focus from Washington will be on prospective measures, and not retroactive measures.”

She even thinks that lots of borrowers will choose to default on their mortgages even if lenders are willing to modify the loan terms. Why? Because if your house is worth less than what you owe on it, why would you want to bend over backwards to keep making payments? To put it in terminology that Wall Street understands:

“If you owe more than the house is worth, your default option is ‘in the money’.”

Reader Comments


September 10, 2007 10:53 PM

Bring on the real estate bust, and keep the demagogues in Washington out of it!

My wife and I have watched while the greedy and the ignorant have driven home prices into the stratosphere. Now, let them pay the piper. It's our turn to buy a home at a reasonable price.

And if the meddlers/panderers in Washington use our tax money to continue to keep housing unaffordable, that would be the depth of perversity. The nation shouldn't stand for it.

Brian R.

September 11, 2007 8:10 PM

Chris, I hope you will convey your position to your representatives in Washington, just as I have been informing my representatives (via faxed letters). The folks on Capital Hill are under a lot of pressure to bail out the borrowers, lenders, and secondary investors. Unless those folks on the Hill hear the views of those of us who vehemently oppose any such bailout, we taxpayers could very well end up paying for the poor judgments and misdeeds of others.

Brian R.

September 11, 2007 8:18 PM

Oops. That's "Capitol" Hill, of course.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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