Category Archives: Housing

Compensation for the additional risk

The key for the lenders is the compensation for the additional risk. They simply up the fees and rates to the point that it more than covers the default probabilities. This is one reason why PhD’s and others that are involved with default probabilities are so in demand. If you can build a model that will quantify the risk in such a way you can assign a rate to it, the firm can then make money off of anyone, opening up an entire new business segment.

Of course, for the borrowers, this is a very interesting development. They used to be stuck for loans with bad credit as they just weren’t available. Now they are available and the market is becoming competitive. Hard to imagine a company vying for the business of a bad credit risk, but if the fees and rates are high enough (the rewards) it’s worth taking the chance (the risk). As with just about everything else in finance, if the risk is worth the reward, someone will take it.

Slow spiral

If the housing boom isn’t over, and by boom I mean prices in excess of value, and there is further to go up, doesn’t that mean it will be that much further to drop and it will take that much longer to get the market back to true value?

If speculators are still hopeful, can we have reached bottom? In other words, doesn’t the market have to flush them out to start back up for real?

I believe the likely scenario is a slow spiral with plenty of hiccups along the way.