Housing market collapse.

1.4 trillion of debt and counting, most of it against property.

Having credit available to two-thirds of the population to buy a house was completely unknown in any previous credit cycle in Britain.

FoFP

This has just clicked - you haven't been around here for a while.

The trouble with asking the investors to do something with their investments (and Paulson is encountering this behind the scenes in his plan to ask them to write down mortgage-backs to the new lower values of housing in the US) is that the investors can stick up two fingers.

If you then use state force to make them do as you wish, they'll just take their money and stick it under the mattress. The end result of that is what happened to Northern Rock and the cash starvation that's happening to the other banks now.

The investors are largely international and hugely leveraged. To some extent their money only anyway exists notionally. There's no real way to force them to do anything with it. Beggars can't be choosers and right now, those with mortgages are very much the beggars.

Since what they really want right now is their cash back (50 trillion in credit is going to be converted to 10 trillion in cash and nobody wants to be in the 80% who lose) they'll take the position of "If you want to move, you give me my money back" just to get what they can.

It's not rational from a systemic point of view, but it is for any given lender.

FoFP

All of whom made a bad bet and will have to live with the results. They knew the rsks when they took on the bet.

Using what? They're not going to get a mortgage without a large deposit.

Assuming that mortgages again become common in anything like the volumes they were in the bubble. That's not in my view likely.

Indeed. It's something to look forward to. The credit bust is the cure. It was the bubble that was the disease.

FoFP

If I want a pint, I'll buy it now rather than wait until next year when it's 10% cheaper. Same goes for PCs. They drop in price almost by the minute, but plenty gget sold.

There's good deflation and bad deflation. Falling house prices is good deflation.

FoFP

He should have thought about this 4 years ago when 'doing something' to stop them rising so stupidly fast might have had an effect.

tim

That's a big part of the problem. If people saved for a house rather than borrowed, I bet that prices wouldn't have gotten nearly so crazy.

FoFP

Clue: if you're going to move, then rent rather than buy. The Germans buy when they settle down. It seems to work well for them and they're thee one nation I can think of which won't be hit by the housing bust.

FoFP

If GB wanted to stop house prices running away he could have done so by banning 100%, 125% and even 95% mortgages.

People may think that this level of interference in the market was too much (in the current era), but anyone with any basis understanding of economics would know that a bust would eventually come and the higher prices got, the worse it would be, so the medicine seem reasonable to me

tim

Suggesting that they are *for* something is an absurd superstition. What possible mechanism could there be?

-- Richard

You think a regulation like that is going to make much difference to them? It's not as if they'll lose lots of money by it: what good does it do if person instead stays in the same house? They'll still have the debt. It would have a negligible effect on the building societies and banks, but would make life much better for the people affected and would probably also contribute to keeping the house market moving.

There are any number of regulations concerning mortgage lending. Do you really think they would even notice this one?

And presumably this is only part of the mortgage market. Aren't the building societies still lending out money that individuals invest rather than engaging in international loan trading?

But they won't get anything. The people concerned *can't* give them the money back, because they don't have it.

-- Richard

I'm not sure what you're asking here. Can you elucidate?

FoFP

I'm not sure which would be more worrying:

a) Brown hadn't a clue that we were in the middle of the largest credit bubble in history and marched us solemnly to disaster.

b) He knew, but figured he'd enjoy the fun while it lasted and land the Tories with the aftermath.

FoFP

What % of the market is >0%?

Of course any govt which tried that would have taken a lot of flak for attacking first time buyers... actually the govt. was doing the reverse by sponsoring shared ownership schemes

Govt. has the wider responsibility to preserve stability and is justified in regulating banks. Of course the critics would have howled that we don't need regulation and we should be championing the buccaneering capitalist spirit (e.g. like the directors of Northern Rock).

Saying that "busts are there to clear out deadwood" is like saying "MRSA is there to improve hospital hygiene standards". For it to be true their would have to be some guiding hand at work.

-- Richard

That assumes that a person earns sufficient money to pay for where they are living (perhaps rented accomodation), save enough to buy a house within a reasonable timeframe, and also enjoy a reasonable standard of living.

The problem with that is that during the time that the average person is able to make do with cheap accomodation & living expenses (before getting married & having kids etc.) they are not earning enough to be able to save a fraction of the cost of a home. By the time they are earning more, they need to spend more on accomodation and other family necessities.

To save enough to buy a very modest home within 10 years, you would have needed to save about £500 a month. You would be hard pushed to find anyone who could afford to save that much after paying all the

*essentials* (including suitable accomodation), even if they went without anything that could be termed a luxury.

Of course, it is possible to live like a student until you are into your 30's, but that is not without several significant disadvantages.

If the mortgage repayments can be afforded, a heck of a lot of people will get the deposit somehow. In many cases it will be via a no-interest loan from their parents, many of who don't really want their son or daughter living in their house into their 30's.

Yeah well, OK, but you know what I meant.

FoFP

At the margin, and every trend is decided at the margin.

Sure, but if a person wants to move and they have to settle the debt or find a different borrower in order to move, then it gives them motivation to do so.

The building societies and banks largely are no longer "the lenders". The holders of mortgage-backs and CDOs are now the lenders. The banks and building societies were until recently merely the conduits for lending.

Well, it's likely that the investors possibly do want to at least keep the housing markets moving for just long enough for them to pull their money out. Other than that, their attitude is going to be pretty much "That bubble's burst. Where do I put my cash once I get it back?"

They just discovered a bunch of laws in the US they hadn't really paid attention to. One was that in many states, someone closed down in negative equity can't be chased for the loss (except by the taxman who sees that difference as a income gain immediately liable for tax).

They've also discovered that if the mortgage company didn't do due diligence, they can pass the duff mortgage-backs and CDOs back to them. Not checking stated salaries may well be lack of due diligence (the IRS made an easy check available on the web and it was largely ignored in the nod-and-a-wink "liar loans" mortgage culture). They're going to avail themselves of that en masse and a lot of people who lied on a mortgage loan are going to see their names flagged in court as fraudsters...

So yes, I think they pay attention to mortgage law. At least they do NOW...

Where they can get it. I think the market in mortgage-backs may currently be about as healthy as the housing markets.

Which is why this is a fifty-doesn't-go-into-ten game played out in the trillions. It's still Devil take the hindmost to get out though because the last eighty percent left in don't come out with anything...

FoFP