It's the sub prime firms that are toast. Those guys thought they were on easy street and will have all their equity evaporate. After their equity is gone, the rest of the loss will belong to investors who have mortgage backed securities in their portfolios because they were greedy for yield. People forget risk/reward does really mean RISK/reward. The intermediaries like MS will have to eat a little, but not much. They have good lawyers and wrote the rules of the game.
Very few homeowners are truly exposed to a wipeout. Most of us just sat by watching a paper profit make our houses double or triple in value. If it then peels back, big deal. The fear is that the debt binge fueled by people that borrowed against their equity to buy fancy cars and European vacations will hit the overall economy and trigger a recession. That could be, but it is overdue and probably needs to happen to bring the system back to a more stable position.
My guess is all those empty houses will end up occupied by the same people that owned them. Just as renters which is what they should have been in the first place.
I do feel bad for marginal buyers who were conned into buying houses they couldn't really afford at real interest rates. Those teaser rates to con people out of their down payment or closing cost fees are criminal. perhaps we should ban any loan to a homeowner without a fixed interest of at least 5 years?? And 100% loans to owner occupied units should only come from govt agencies such that buyers get as much slack as possible to recover from income hiccups.
the debt binge fueled by people that borrowed against their equity to buy fancy cars and European vacations
Now we know how Europe manages to survive - debt-fuelled American tourism! :-)
but we didn't borrow to do it. My BIL on the other hand has 3 vehicles, a travel trailer, motorcycles, every tool imaginable (and only magnesium cases to save weight). How does he do it? He was in debt up to his eyeballs as the cheezy commercial goes. Spent virtually all of the $400K his house price ran up. But at least they sold and didn't get stuck with it.
I see plenty of friends who complain about debt loads driving vehicles that cost $50K. boo hoo hoo is what I'm thinking behind the smile and the nod.
