Thursday, August 11, 2005

Housing bubbles and banks

So you are a bank and worried that housing prices are going to deflate. You worry because falling housing prices will encourage people to foreclose on their property if the value of that property sinks below the outstanding debt, which means you get stuck with a bunch of dud loans.

In the US, a sophisticated secondary market for mortgages (and mortgage tranches) means this risk is spread around and probably just factored into the broader interest rate. I'm guessing that Dubai does not have such markets because there, banks are only lending based on the original value of the home. Subsequent appreciation is not fianced by them.

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