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" It's Heading For Crunch Time..." From The M F

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http://uk.biz.yahoo.com/19072007/35/s-head...runch-time.html

Thursday July 19, 12:55 PM

It's Heading For Crunch Time...

By David Stevenson

Times are getting tougher in the US. Long-term interest rates are on the rise and banks are cutting back lending -- what's known as a "credit crunch."

There's a credit crunch happening in US capital markets, and it could hurt us here inThat's when long-term interest rates rise and banks cut back lending.

So what, I hear you say. For many of us, US credit market woes sound a bit frightening, but not our problem. We measure our financial wellbeing by the level of the stock market and by the value of our houses, not by complex debt products that few of us had even heard about until recently.

In fact you've probably got a bit bored with this already.

But please don't stop reading yet. Let me just explain a little more, and how this US glitch might soon affect us over here in the UK.

The trouble started when US mortgage lenders started lending more aggressively to less creditworthy (so-called 'sub-prime') borrowers. Now that the US housing market has turned down big style, some lenders have been hit and indeed have been forced to shut up shop.

But the real problem lies with recent, supposedly increased, financial sophistication which has enabled these lower quality mortgages to be sold off by the original lenders.

Imagine your mortgage being transferred from the building society who lent you the money to a faceless investor you've never met.

Welcome to the Byzantine world of CDOs. Standing for Collateralised Debt Obligations, these are packages of mortgages traded on the debt markets by professional investors. The return can be high, but when things start going wrong, the dodgier CDOs can get blitzed.

In profit-hungry financial markets, many professional investors have been buying high risk CDOs to increase their investment returns. But they have also been taking on a much higher level of risk. Indeed some investors have borrowed money to buy the debt, increasing the risk still further.

Payback

Now it's payback time.

Two Bear Stearns hedge funds once worth a combined $20bn (£9.8bn) have just admitted to being literally wiped out by their CDO losses. Debt markets became worried that these funds would then become forced sellers of other assets leading to a collapse in prices.

Bail-out loans to these funds from the Bear Stearns (NYSE: BSC - news) parent company may have temporarily lowered the debt market temperature, but I reckon the US sub-prime mortgage crisis has only just started. Defaults on risky home loans are likely to soar as temporary "teaser" rates come to an end this year and next.

Michael Farrell, chairman of US based mortgage-backed securities investor Fidac, said that up to $1,000bn (£488bn) of home loans could revert to much higher floating rates in the next two years. More than half of these could be loans to greater risk sub-prime borrowers, many of whom will default on interest payments when higher rates kick in.

As rising defaults and repossessions among sub-prime borrowers further depress US house prices, the reduced availability of mortgage finance will undermine demand for property.

And with a number of hedge funds trying to unload hefty amounts of devaluing CDOs there may be few buyers. There is a real danger of the US sub-prime mortgage collapse turning into a wider financial crisis.

Apocalyptically, the CDO crisis could erode the entire $1,000bn capital base of the US banking system. Less dramatically, it could cause a serious drop in the banking system's ability and willingness to lend.

Even if commercial banks aren't the really big CDO holders, watch out for alarming news of more hedge funds casualties. Even scarier, some riskier chunks of sub-prime mortgage debt held by CDOs are not owned by "real" investors but by other CDOs.

As hedge funds are big borrowers, the net result could still be the same for the banks. And such is the worldwide diversification of risk that at some stage the UK banks must get hit.

Which could slash their lending this side of the pond, including that to the private equity funds who have been so instrumental in driving London share prices higher.

So the rapid growth in money and credit that has driven up both UK house and stock prices would dry up.

Already the days of cheap credit are ending as the Bank of England raises interest rates in response to above-target inflation numbers.

The Council of Mortgage Lenders (CML) has just said that higher than expected interest rates are set to provoke a crunch in the UK property market next year with the lowest forecast price growth for 13 years, implying a real (i.e. inflation adjusted) decline in home values as consumers struggle with painful mortgage repayment increases.

Last week a Bank of America report rated the likelihood of a UK housing market crash in the next two years as a 20% chance.

Money taps

You get the picture. We know about the US sub-prime mortgage horrors and the resultant CDO risk to the banks. What began as a problem for borrowers has now turned into a problem for lenders. We know the money taps are being turned off. We don't know yet just when, or how fast, the liquidity evaporation will impact asset markets over here.

The historic correlation between housing market declines and stock market falls has been tended to be imprecise. In other words, not everything necessarily falls at the same time.

But such has been the degree of asset inflation over the last few years that all the bubbles could now burst simultaneously

:o

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But such has been the degree of asset inflation over the last few years that all the bubbles could now burst simultaneously

:o

Bring it on! Now this would be fun to see.

(bounce, bounce, you know what its about)

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PUT those two statements together.

I think it is fair to say that the losses HAVE eroded the equity substantially,

but the impact is simply not being properly measure yet.

This is a serious meltdown well underway, whatever people are doing to hide it.

What is total lending by US banks? I'll bet its a shed load more than USD1 trillion.

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Bring it on! Now this would be fun to see.

(bounce, bounce, you know what its about)

The great might of this crash will bring the whole finacial system down on the heads of the home extension buying public.

The wave of pain will sweep from the USA across the Atlantic until the UK is left with nothing more than a memory of HPI and some dodgy 4x4's.

The mortgage ladened will be crushed and the unemployment figures will mount.

Beggers will increase and Mr. Brown will say "I told you so". Merv will be long gone.

Say hello the great crash of 2007.

It's on it's way to a street near you this Autumn!

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The great might of this crash will bring the whole finacial system down on the heads of the home extension buying public.

The wave of pain will sweep from the USA across the Atlantic until the UK is left with nothing more than a memory of HPI and some dodgy 4x4's.

The mortgage ladened will be crushed and the unemployment figures will mount.

Beggers will increase and Mr. Brown will say "I told you so". Merv will be long gone.

Say hello the great crash of 2007.

It's on it's way to a street near you this Autumn!

correct end of summer, actually august is always a good bet, the month that has the most crashes in history.

Edited by crash2006

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