On Sun, 30 Jan 2005, James at communistbanker.com wrote:
> [T]he risk to the banks isn't actually that great...a large part of banks'
> mortgage books are sold on to investors, with the banks taking a fee for
> managing the loans. So the credit risk is with insurers and pension
> funds.
You raise an interesting point, James. Many people have said the ultimate price to be paid for a housing crash would be a government bail-out that everyone would have to pay for. But if in fact most mortgages have been securitized and sold on to a market that isn't government insured, that wouldn't happen. What would happen instead is that the mortgage-backed securities market would tank, and the price and supply of such securities would be radically revised. This would result in a big jump in the cost of mortgages, a contraction of the number of buyers, and an additional source of serious downward pressure on housing prices, making it that much harder for the housing market to recover.
So the end result of a doomsday scenario -- an unprecedented fall in housing prices -- would not be a huge government bail-out, but rather a housing market that was stuck in crisis for many years, with serious negative wealth effects. And possibly a very bad negative interaction with the falling dollar and rising interest rates.
And then again, it may never happen.
Michael