you failed to address virtually all of my points.

and it is the imputed income that is the most interesting, i think. today, the issue was addressed in the front page of the nyt.

you may have been there, but you were not paying attention.

Nah, not ages. I’ve seen this in 1991-92 in the North-East: unoccupied properties, foreclosures, FOR SALE signs, the whole enchilada. People with money will buy them and everything will spring back in a few years. Life goes on.

firstly, what do the lenders do with the foreclosed properties? HOW DO THEY DISPOSE OF THEM? most of these subprime production-built properties are junk. in a very real sense, they were the mechanism by which the retillians purchased voters. study that major bushit pioneer bob perry and his home-building empire for instance. was cheap money the method of rewarding major reptillian “contributors”?

the next major issue is “imputed” income. how does the irs respond to the mortgage walk-aways?

next, the changes in the bankruptcy laws that the congress[reptillian/demtillian]enacted some months ago….how will those changes influence this round of musical chairs?

one interesting aspect of all this is the “second” residence market. how many of those “jumbo” mortgages are out there as stranded properties, do you think? i had a friend just return from a vacation to wiscasset, me. she uses a family house for a couple weeks every summer. this july/august she tells me that the number of FOR SALE signs exceeded anything that she has ever seen.

how long can residential properties go unoccupied before they require demolition? as was the situation some years ago when the bushit 1 was running the S&L bust-out, metro houston, metro dallas have an extraordinarily large number of foreclosures, imminent foreclosures. in spite of the purportedly meteoric texas boom economy.

to my way of thinking, welcome to the new dark ages.

Not strictly true. Many “first-buyer” houses are purchased by investors as rental properties, but the figures have to work—mortgage payments have to drop into the vicinity of potential rents.

But this sub-prime disaster comes on the heels of the biggest influx of first-time home buyers in a very long time, because lax standards in lending meant more people could qualify for more than ever. Now defaults are putting those homes back on the market and taking those owners out of the market, and strengthened lending standards will all but halt the influx of new buyers into the market. Without first-time buyers, most of the market is incapable of moving.

I would have thought a typical cost to foreclosure to the lender, even on a pretty bad loan (say 100-105%LTV) might be around 20-30%. And even in the subprime market, I’d have thought that a 5-10% default rate would be quite high, and much more very unlikely barring a major recession.

Even looking conservatively, a 15% default rate with 40% loss ends up being 6% of the market, comfortably in Bernanke’s range. To get more than 10% of the market, either default rate or loss rate has to be very high, higher than the stats I’ve been seeing on how bad things are suggest is likely.

Of course how that number rebounds in the derivatives market is another question, but as an estimate of the underlying sub-prime problem, 5-10% of the market seems fairly reasonable.

I also don’t get the scariness of scary story 3. Or rather why the lender’s problem in the US is any different than in australia. What mortgage lenders in the US have done is to limit their upside. The downside is exactly the same as with a fixed-interest, fixed-term loan.

If anything, the downside is better for US banks, because some borrowers will pay back early, even if it is not in their interest. When interest rates are high relative to outstanding loans, even small percentages of early payback are a huge boon to the lender.

Secondly, on first thought, it seems more efficient to allow early payback. How do Australian lenders deal with a property sale? Can you pay back the loan early without penalty if you sell the mortgaged property? If so, then people will probably sell to get out of bad loans. If not, what do you do when someone needs to sell anyway? Do they need the consent of the mortgage holder? Does the loan carry over to another property? What if there isn’t another one or the value is less than the loan? Does it become unsecured?

It seems like all the possible answers to these questions will have unintended consequences, People will make less efficient real estate decisions in some interest rate markets because of the mortgage consequences. Allowing prepayment decouples interest rate exposure from property exposure, and also means that lenders are providing insurance against interest rate risk to borrowers. Which seems like an efficient proposition to me—who can stomach more risks, MBS investors or individual home and business owners? It’s efficient to package this risk and sell it to big institutional investors with huge portfolios. If you pawn it off on individuals, the cost will still be there (and be greater), it will just show up in lower property prices and higher appreciation expectation.

And of course, the availability of variable rate loans means that people can opt out of buying that insurance, although the current cost of that insurance is so low and the structure of variable rate loans so strange that whether to go variable has much more to do with a long/short hold bet than whether it’s worth paying to insure against interest rate risk.

It took a decade but they worked themselves out of the hole. It did put a big damper on economic growth, but that was the trade off to prevent a worse problem.

The Fed could easily engineer something similar, or congress could create another resolution trust entity to handle the clean up. At the moment people are over reacting and statements like:

“It appears that there is around a $1 trillion dollars in sub-prime debt outstanding, and much of this is likely to go into default this year,” only add to the fear.

Wise people with lots of time and ready cash are probably already buying under-priced assets. Warren Buffet certainly is.