I suspect other factors would prevent such a long term “crash”, because the market would quickly evolve to fit the new playing field. And keep in mind, we’re probably looking a pretty huge crash as it is. What a policy such as I suggested would do is prevent another massive bubble built largely on fraud, that will inevitably burst. Certainly the phenomenon of builders churning out huge fancy homes by the thousands, into a market where the only “buyers” are people who can’t afford them, would vanish.
It is not as large a crash as you have been led to believe. At the beginning of September, 13% of subprime loans were in default by two months. Since only 14% of the whole mortgage market is subprime, the exposure is limited. Since the average subprime loan is about half of average housing price, the exposure is about half the above numbers.
Doing the math, the actual financial exposure is about .91 of 1% of the total mortgages. Not a big problem.
The reason it is being sold as a world ending problem is because of the MSM’s (I am also a small player in the MSM)need to generate a financial crisis during a Presidential campaign in order to cause as much hurt as possible to Republicans. There will be others coming on about every three months. TV analysts hold production meetings every Friday or Monday and they talk about the story lines that can be developed over the next week, not about how they can get better information to the public. They are for entertainment purposes only and they take that seriously.
I used to be in banking and this story smells. I am also familiar with WAMU’s underwriting procedures(I am a realtor and I have used them at various times) and this story appears to be mostly BS. Not sure what happened here, but I don’t think it is as written.
60% of home buyers are first time purchasers. If you eliminate even half that number, you have an economic problem that will take years to overcome.
We actually had a period of time when banks in the US held more fixed income securities than they had outstanding loans. In other words, they weren’t making any loans. Sound like the Depression? Nope it was in the early 1990s.
Reliance on the banking industry for all real estate transactions is a poor substitute for the current state in which risk is highly diffused through the sale of mortgage backed securities to investors.