Deflation Message Board - Msg: 23336099

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Non-Tech : Deflation

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To: Maurice Winn who wrote (339)	3/2/2007 8:16:12 PM
From: JF Quinnelly	Read Replies (3) of 621

Housing is going to squeeze a lot of "owners" by the throat, especially in California. The boom in this state has been fueled by exotic mortgages that were previously used by a small number of borrowers, borrowers with high income and financial sophistication. This time exotic loans have been given to the most marginally qualified borrowers, and the loans are starting to default at record rates. The amount of exotic loans due to reset in the next year is something like 1 trillion dollars. A lot of these borrowers are going to lose their houses when their loans reset. They won't be able to make the new payment, they won't find anyone willing to refinance their loan, and they won't be able to sell the house to cover the loan. The experiment of giving marginal borrowers 100% financing and payment option ARM loans is coming to a crashing halt. Bernanke can cut rates all he wants- the damage in the RE market is already baked into the cake- at least in bubble zones like California. The game of extracting equity from the family house/ATM is going to disappear as that equity vanishes. Bad loans will result in credit contraction. And maybe enough credit will contract to give us that rarest of phenomenon, deflation.

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