Thursday, July 26, 2007

Hedge Funds, Housing and Subprime Contagion

Prime borrowers catching subprime ills
Countrywide Financial's quarterly report revealed a spike in delinquencies. Why even high-quality borrowers are falling

NEW YORK ( -- The subprime mortgage meltdown has begun to spread to prime loans as even credit-worthy borrowers have started to fall behind on payments.

On Tuesday, Countrywide Financial (Charts, Fortune 500), the nation's largest mortgage lender, attributed a big drop in profits to a spike in delinquencies among prime borrowers of "second-lien loans," including home equity loans and home equity lines of credit.

These loans were often "piggybacked" onto first mortgages to help finance low- or no-down home purchases. They were also taken out by prime - but overburdened - borrowers to help pay high housing bills or fund their lifestyles.

In the past, mortgage delinquencies were tied to personal problems or basic economic reversals, such as a job loss. Today, many delinquencies can be traced to unaffordably high home prices.

"Unable to afford their own homes, [borrowers] turned to increasingly risky mortgage products," said Amy Klobuchar, a member of the House of Representatives from Minnesota, speaking Wednesday before a hearing of the Joint Economic Committee examining the national foreclosure crisis.

Some home buyers, caught up in red-hot markets and afraid of getting locked out of homeownership forever, overpaid for houses.

As long as prices escalated, they were able to tap the added equity in their properties to cover debts.

But now home prices are falling - off more than 2 percent from their highs, according to the Case Shiller home price index.

What could derail the M&A boom
A number of factors have driven the M&A market to record levels. Here's what might turn off the flow of deals.

LONDON ( -- A swell of private equity buyers, solid corporate profits, the availability of cheap debt and robust liquidity have all helped propel the boom in mergers and acquisitions.

U.S. merger volume has risen to $1.2 trillion so far this year,
according to deal tracker Dealogic. By comparison, deals in the U.S. totaled $1.5 trillion for all of 2006.

While many in the industry agree that activity has peaked, they also say the fundamentals underpinning this activity remain strong. In short, barring some external shock, few expect the boom to go bust.

At the same time, the factors keeping the deals flowing are strongly linked, which means that a problem that crops up in one area could trigger a chain reaction of difficulties for the market. Here's a look at what analysts are watching for.

Complete article: CNN Money

It was not a stretch to project subprime contagion to higher quality loans, but now prime borrowers are falling into the soup and that’s not good. It has been estimated that up to half a $ trillion in subprime loans were at risk, but with higher quality paper now entering default that amount rises considerably and threatens the stability of a number of investment banks, hedge funds and a broad range of investors.

But still the M&A machine grinds on. Does anyone else see this as a house of cards? The stock market is breaking records based not on earnings but on inflated share prices and fevered buying. (If you don’t buy in now you may not be able to afford it later) sound familiar? If it were not for the currently easy access to credit, this would not now be taking place.

When this credit cycle ends, and the end seems imminent, then a crashing sound will be heard through every economy on earth and the tax payers of many countries will be seeking medical attention for the multitude of unauthorized rear entries they will be subject to by their governments in the name of the wealthy few who will keep most of their undeserved gains.

For all of you who are already having trouble sitting, practice these words:
A bailout will only benefit investment banks. They perpetrated this credit nightmare; let them clean up the mess.


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