Housing: The Steeplechase Analogy

[Crewleader]

charles hugh smith






Housing: The Steeplechase Analogy (April 30, 2009)


The inevitability of the housing/ leverage/speculation bubble's collapse can be illustrated by the analogy of a steeplechase in which the hurdles are lowered to near-zero: everybody qualifies, everybody wins.

Though there are many causes for the housing bubble's expansion and collapse, let's consider the most basic one: the bar for qualifying for a mortgage was lowered to near-zero. This can be illustrated by a steeplechase analogy in which the long-standing prudently high mortgage qualification hurdle of "20% down, verified income and 35% maximum of income" was replaced by one a mere few inches in height:

Surprise--everyone with a pulse and the will to lie/stretch the truth not only qualified for the "race," they all crossed the finish line with flying colors. Is there any wonder that millions of marginal buyers leaped into the race, and that their marginality was quickly revealed once they left the track and returned to real life?

And now that the entire charade of passing off these millions of highly risky, doomed-to-default mortgages via securitization to unwary investors has ended, risk avoidance has led not just to a reinstatement of higher qualifying standards but a raising of the bar.

So now in the post-bubble aftermath, the hurdle not only excludes the marginal risky borrowers, but some of those who might have qualified before the bubble mania infected the housing and lending markets.

http://www.oftwominds.com/blogapr09/steeplechase04-09.html?ref=patrick.net