Thursday, August 14, 2008

Are We in a Feedback Loop?

CNN Money has an article about the latest wave of mortgage defaults.  First there were problems with subprime loans, those borrowers with credit scores below 62o.  Next there were problems with Alt-A, those borrowers with good credit but hard to prove income.  Now there are rising defaults coming from prime borrowers.  Delinquencies for this class almost doubled in May, as opposed to a year ago.

The percentage is small 2.44% in May 2008.  But the impact can be huge.  

"Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price Index.  

And there's a strong inverse correlation between home prices and defaults, accouding to Lawrence Yun, chief economist for the National Association of Realtors.

'It's a feedback loop,' he said. 'Price declines lead to more defaults, which leads to more price declines.'"

Time will shake us out of this cycle.  But at least in the near term, banks are going to be even more cautious in lending.  The bottom line:  money will be harder and more expensive to come by. 

You can read more here.

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