Calculated Risk is my new favorite blog.
They informed me that:
July 10 (Bloomberg) -- Moody's Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages and Standard & Poor's said it may cut $12 billion of securities after criticism they waited too long to respond to rising home-loan defaults.
Moody's cut ratings on 399 bonds issued in 2006 and said it may reduce rankings on another 32. S&P is preparing to lower the ratings on 2.1 percent of the $565.3 billion of subprime bonds issued from late 2005 through 2006, citing a deepening housing slump. U.S. Treasuries rose, the dollar slumped and financial company shares led stocks lower.
When this news hit the market today at around 1:30 ET, Dow dropped sharply, ending down 100 points.
Here's the scary part:
S&P said it is also reviewing the ``global universe'' of CDOs that contain subprime mortgages. Investors in CDOs alone stand to lose as much as $250 billion, according to Institutional Risk Analytics, which writes computer programs for auditors.
Hedge Fund company stocks took a big hit today, with Bear Sterns tanking 4%, and Blackstone down almost 5%, to $29.93. That's down from the $31 IPO earlier this month (or was it late June?).
I'm basically just posting this to see what all ye Kossacks think: will the Mortgage Meltdown start effecting the economy in a serious way? Will recession return?
ANd if you don't know what's at the heart of the matter, this is how I summed it up before:
- After 9/11 and the Dot Com bust, Alan Greenspan and the Federal Reserve lowered interest rates to unprecedented rates for an equally unprecedented time to stave off recession.
- This made borrowing money very cheap, lowering interest rates for mortgages, home equity loans, and any other loans to historic lows.
- Mortgage brokers marketed and invented new kinds of mortgage loans--the "adjustable rate mortgage", the "interest only" mortgage--to qualify unworthy debtors in to larger and larger houses.
- Housing prices began to rise at ridiculous, double digit rates because getting a loan was very, very easy. This significantly increased the pool of potential buyers, pushing up demand, and increasing prices.
- Hedge Funds (like Braddock) started hawking investments comprised of "CDOs"--Collateralized Debt Obligations--which are basically mutual funds made up of thousands of mortgages bundled together as a bond, promising ridiculous returns on investments with little to no risk.
- Turns out all these houses aren't really worth what we thought. Turns out housing prices are going down, and the number of unsold homes is now at a record high.
- Not only that, turns out all these people with "questionable credit" can't pay for their loans. Foreclosures and defaults are at an all time high and all these fancy loans are now "resetting" causing once low mortgage payments to suddenly double. Most expect defaults and foreclosure to continue.
Is the end nigh?