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Wednesday, 2 April 2008

Toxic mortgages coming home to roost

There are dark clouds on the horizon, and the storm seems to be gathering pace.

First Direct have withdrawn all mortgages from the market, which is the equivalent of one of our newspaper clients deciding that they can't afford to cover sport any further. My understanding of the dynamics driving this are:

Mortgages sold badly in US to people who can't afford them, who default, making the investment fall over. All these have already been packaged up and sold onto financial institutions, who re-package again and then re-sell. Which then starts falling over to an extent, but is a timebomb ticking away, with no-one having much idea as to future effect at an individual bank/institution level as more of the wheels (on the house) start coming off.

So, the banks stop lending each other money as they don't know who is solvent, and who is playing pass the parcel with the timebomb with the music still playing. This means cash liquidity gets badly squeezed, and the cost of borrowing the diminishing amount of money available then goes up.

Then the institutions don't have money to lend for mortgages at competitive rates, so they have to stop offering the products.

So, then it gets harder to get a mortgage, and also to re-mortgage when you come off a fixed mortgage. Which means it costs people more in monthly payments. Which hits consumer spending, which slows economic growth, and threatens recession, which costs jobs, incomes and home ownership.

And all because some grubby American salesperson, with the ethics and morals of the gutter, was sent to sell mortgages to people who could never hope to afford them, and signed up vast numbers of the economically challenged into really bad deals.

Anyone got any good news?

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