ctenidae
Active member
Not that any of you are asking for it, and I wouldn't recommend you take this advice without doing your own research and seeking more qualified council, but there are some troubling events on the horizon.
The important nugget is interest rates are going to go up, possibly quite dramatically and probably rather soon. If you've got an adjustable mortgage due to reset in the next 3-12 months, I'd consider shopping around for a fixed refi.
Here's the nutshell rationale:
Subprime loans are resetting rapidly at much higher interest rates, leading to greater defaults. This fact has led the buyers of subprime mortgages to stop buying lately. However, most subprime mortgages are packaged with higher quality debt, and since no one wants the subprime stuff, the high quality isn't getting bought, either. Banks that have been underwriting the high quality stuff are now having trouble selling the debt off, meaning they hae to keep it on their balance shees, which they do not want to do. As a result, they aren't underwriting new debt (Chrysler just cancelled a big debt offering). Since the banks don't want to take the risk of holding the debt, they're going to tighten credit, mostly by raising interest rates substantially.
Back to the subprime resets, for many homeowners who bought way more than they could afford (we'll leave predatory lending, etc, for another discussion) it's become economically feasible, and preferrable, to default on the mortgage rather than pay it (sucks paying a $500,000 mortgage on a $350,000 home). This puts a lot of foreclosures on teh market, which depresses home values overall. Without the equity cushion, consumers loose confidence (those numbers come out today, and I expect them to still be high. Check again in 6 months). With no confidence, consumer spending drops (out today, too, and I expect them to be stable). Consumers stop buying, manufacturers stop producing, which means they lay off workers, which further cuts spending. Vicious cycle, there. With demand low and interest rates high, companies can't or won't borrow money to expand. Result: economic slowdown.
The most frustrating thing is, I know what's going to happen, but I can't think of a defensive play. Usually, when bonds fall, equities rise, and vice versa. This is going to be across the board.
The important nugget is interest rates are going to go up, possibly quite dramatically and probably rather soon. If you've got an adjustable mortgage due to reset in the next 3-12 months, I'd consider shopping around for a fixed refi.
Here's the nutshell rationale:
Subprime loans are resetting rapidly at much higher interest rates, leading to greater defaults. This fact has led the buyers of subprime mortgages to stop buying lately. However, most subprime mortgages are packaged with higher quality debt, and since no one wants the subprime stuff, the high quality isn't getting bought, either. Banks that have been underwriting the high quality stuff are now having trouble selling the debt off, meaning they hae to keep it on their balance shees, which they do not want to do. As a result, they aren't underwriting new debt (Chrysler just cancelled a big debt offering). Since the banks don't want to take the risk of holding the debt, they're going to tighten credit, mostly by raising interest rates substantially.
Back to the subprime resets, for many homeowners who bought way more than they could afford (we'll leave predatory lending, etc, for another discussion) it's become economically feasible, and preferrable, to default on the mortgage rather than pay it (sucks paying a $500,000 mortgage on a $350,000 home). This puts a lot of foreclosures on teh market, which depresses home values overall. Without the equity cushion, consumers loose confidence (those numbers come out today, and I expect them to still be high. Check again in 6 months). With no confidence, consumer spending drops (out today, too, and I expect them to be stable). Consumers stop buying, manufacturers stop producing, which means they lay off workers, which further cuts spending. Vicious cycle, there. With demand low and interest rates high, companies can't or won't borrow money to expand. Result: economic slowdown.
The most frustrating thing is, I know what's going to happen, but I can't think of a defensive play. Usually, when bonds fall, equities rise, and vice versa. This is going to be across the board.
Wish I took some financing courses in college but I am learning pretty quickly. Sure is some fascinating stuff with so many possibilities... and so many potential bad decisions.
