But if the lender has excess inventory, would he not be forced to sell at a discounted price? And would that not make housing more affordable and cause cash flow to increase, lubricating the economy?
I admit I'm weak in economics, but I’m struggling to see a national crisis. It looks like a crisis to the lenders, but that’s a risk they took in making these loans.
If a mortgage company made a loan to you, they hold the mortgage note. If that is all a mortgage company does, they would run out of money and end up with mortgage notes. Too get more money, mortgage companies go to banks to get fresh money and in order to do that they must reduce their liabilities by selling the mortgage notes to a remortgage company. These loans are bundled into portfolios (composed mainly of good loans with some risky subprime loans). The remortgage company will buy these bundled notes at discount based on the type of loans (interest rate and duration) and assumes the loans are backed by homes at a certain market price that exceeds the loan amount. Since homes are dropping so fast the re mortgage company cannot set a price to buy these notes from the mortgage company. The concern that too many hidden subprime loans maybe in the bundles have caused many remortgage companies to hold off buying from the mortgage companies. If these mortgage companies cannot get rid of their notes, they cannot get new money from the banks to loan to new homebuyers, carbuyers and businesses. Economic activity will slowdown if people with good credit cannot borrow money to buy homes, large items or expand businesses because the primary lender is shut off from getting fresh money from the banks because they cannot sell off their portfolios of bundled loans. To make matters worst, major investment banks have brought these portfolios from mortgage and remortgage companies and now discover some of these portfolios are riddled with hidden subprime loans. Thus the portfolios are worth less than the price they paid for them. These investment bankers cannot unload these portfolios and now are just writing them off as losses. This is having a psychological affect on the stock market and financial investors.
That only helps those who buy the houses at discounted prices.
Actually cash flows overall decrease because of the large number of people that now cannot sell their homes and make money or in fact would lose money.