Now we know how the real estate market has become a bubble and the demand side of the equation. In this episode, we will look into the supply side: the lending financial institutions. Traditionally, the subprime lending is the practice of extending credit to borrowers with high credit risk — e.g. a FICO score of less than 620, unable to access prime rate loans (hence the term “subprime”). Subprime lending became popular in the US in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to an estimated $1,300 billion in 2007. This substantial increase is mainly attributable to lending institutions which quickly realized that they could make huge profits from origination fees and from selling the asset-based securities (ABS) to investors. Continue reading ‘Home $weet Home (III)’
Tag Archive for 'ARM'
With a better understanding of the main causes behind the residential real estate bubble, we can move ahead and investigate the intrinsic mechanics of the mortgage business model. As described previously, the underlying distinction between different types of mortgages is: fixed rate and variable rate, also known as adjustable-rate mortgage (ARM). From a market perspective, there are two types of risks associated with the mortgage products: interest rate (IR) risk and currency (FX) risk. If you hold a foreign-denominated currency variable rate loan, you are exposed to both risks. Every time the borrower holds any of the aforementioned risks, the bank benefits unfairly by avoiding the hedging cost associated with mitigating that given market risk. Continue reading ‘Home $weet Home (II)’
It is very hard to pick a ground-zero for the housing bubble that pushed the whole world into The Great Recession. Allow me to begin our trip in late 1989 in Japan. The stock market – symbolized by Nikkei 225 index, peaked at approximately 39,000, while the real estate market climbed the summit at approximately $1 million per square meter. This March, Nikkei traded as low as 7,200 while the property tags lost on average 90% of their peak values. We should notice that Japan experienced a dual-bubble shock and that has been underemphasized by many economists. Continue reading ‘Home $weet Home (I)’
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