Also can add a comment on the size of the losses.
Some estimates of the size of the sub-prime damages appear to us to be double-counting the losses. They add loan defaults to CDO and MBS write-downs and financial institution write-offs. In our view, there’s only one economic loss among these – the foreclosure minus the recovery. The rest are timing decisions in which some are realizing their losses in zero-sum financial calculations, while others will realize gains later.
- On a broader scale, the realized mortgage losses (a foreclosure minus a recovery) are a subset of unrealized losses (over the last couple of years as real estate prices declined). Those followed largely-unrealized gains (the seven-year boom from 1998-2005). From the standpoint of the economic outlook, we think the still-large net real estate gains over the last decade, by adding to household net worth, act as a cushion against a recession.
The Rise and Fall of Subprime Mortgages - Economic Letter, Nov. 2007 - FRB Dallas
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