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Monday, March 19, 2007

Perspective From Ben Stein

I caught part of CBS Sunday Morning yesterday, just in time to see Ben Stein beat up Wall Street for the panic it's creating over the subprime mortgage market.

Wall St. of course, isn't the only place beating the drum about how the subprime market is going to kill the economy, James Grant writing in the Washington Post today suggests foriegn entities holding US mortgage securities should start dumping them.

The MSM has been all over the subprime mortgage issue, at least in the last few months when they started defaulting. Two years ago they were touting how easy it's been to get a mortgage, and how many folks were living the American dream because of the ease of getting money.

The reality is, the subprime market is full of loans that shouldn't have been written, to get people into more house than they could really afford. But is it really as big a deal as everyone's making of it?

Stein pointed out yesterday that those loans, while the amount sounds huge, are really not a huge blip on the whole economic radar of the country. Only 1% of all mortgages ($80 Billion) are in default in a 14 trillion dollar economy, or about 1/2 of 1% of GDP.

He even pointed out that Goldman Sachs; who should be scared to death based on what we are hearing about subprimes; is BUYING subprime mortgages, not selling them. Why do they do that, if, as the MSM and recent market activity says that paper is pure death?

The truth is, even if 5% of subprimes fail, that means that 95% end up being good mortgages, with higher interest rates, and they'll still make money. The owners of those homes will either sell, them or refinance into a better loan when they can. Goldman makes out on those loans.

They also get the bad ones, but they either sell those mortgages or the property off, and offset some of the loss on the bad paper. That's something about mortgages that is different than other loans, there is definitely something tangible there. The property is still probably worth close to what was paid for it, and even if there's a 50% loss on each of the bad loans the amount made on the good ones offsets it by a ton.

Goldman realizes that in the long term they stand to make a large amount of money off the current panic, and are moving the right way, buying at bargain prices. The time to truly worry about the mortgage market is when companies like Goldman Sachs start selling off their portfolios of mortgages.

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