--- Michael Pollak <mpollak@panix.com> wrote:
On your last point, that if banks say you qualify, you probably 
do -- that is true on an individual basis.  But the whole point 
about systemic risk is that it's off the charts.  Banks are quite 
capable of collectively missing a huge risk.  They did it when 
they gave everyone 30 year fixed rate loans as if inflation 
would never soar.  So they can do it again.  They are not 
infallible on this point.  They are not even really relevant.  
It's just not part of their framework to worry about the 
unprecedented.  Their calculations are based on a continually 
rising housing market just as much as the buyers.  The risks 
of an unprecedented crash have not been factored in anywhere.

JG: This is true inasmuch as banks are uniformly expecting 
prices to stabilise/keep rising.  Their main considerations are 
competition (if the other guy's making money from it, why aren't 
we?), regulation (if the regulator lets us do it, it should be 
OK), and market sentiment (if shareholders don't mind, it's fine).  
This doesn't seem unreasonable - banks can't take into account 
every systemic risk.  They just try to have some reasonable 
controls to ensure that other people take as much of the hit 
as possible.

But the risk to the banks isn't actually that great.  Most people 
didn't take out a 100%+ mortgage at the peak of the boom, so the 
overall portfolio looks good - even a 100% loan taken out a year 
ago now looks more like an 80% loan.  But in any case, 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.

--James