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February 20, 2007

What's that point again, Ms. Morgenson?

The NY Times' Gretchen Morgenson's column ($) this past Sunday is entitled "Will Other Mortgage Dominoes Fall?", in which Morgenson explores the current downturn in the subprime mortgage market.

As a result of the increasing default rate in subprime mortgages, Morgenson observes that the mortgage-backed securities that many institutional investors purchased may be riskier than they seemed at the time that the investors bought them. Consequently, she notes that those securities may not be worth as much as the investors want them to be worth and that they may sell them. If that happens, Morgenson rightly points out that the market for new mortgage-backed securities may get tougher and there may not be as much cheap mortgage money around for homebuyers, particularly low-income ones.

What I'm trying to figure out is what's wrong with any of that? Isn't that precisely the way markets work? Isn't it good that many low-income or high-credit risk folks have been able to enjoy the benefits of home ownership? Yes, it's too bad for those low-income folks who weren't able to take advantage of the cheap subprime mortagages, but isn't it good that investment vehicles that securitized subprime mortgages with pools of higher grade mortgages shifted part of the risk of those low-grade mortgages to investors who can better absorb the risk? And isn't it more likely that the downturn in subprime mortgages will be less severe as a result of the hedging of risk that occurs through such securitization?

In other words, what's Morgenson's point in the article? Perhaps Larry Ribstein knows?

Posted by Tom at February 20, 2007 4:03 AM

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