Wednesday, August 08, 2007

Money always runs away

When an asset class starts showing big loses, money ALWAYS runs away from it. And money is running from residential mortgages. LA is reporting that interest rates on jumbo loans have spiked with big lenders charging 8%.

Some this reaction is probably irrational as jumbos from borrowers with good credit and 20% down payments probably don't deserve such a high spread over conforming. But when money heads for the exits, it tends to be irrational. Investors don't make fine distinctions between sub-prime, Alt-A, and high grade jumbos when fear takes over. They just bolt. After the sub-prime / alt-A implosion is over, I suspect the risk premiums on all mortgages will be elevated for years.

The spike in the cost of jumbos is one more sign the housing bubble is bursting.

No comments: