$70 to $90 Billion in Hedge Fund Losses
By Kurt O'Keefe, Attorney at Law on Jul 8, 2007 in General Bankruptcy Information
Per a recent Bloomberg News story, one analyst is predicting that much in losses to be posted for hedge funds in the second quarter of 2007 alone.
Pretty soon, we’ll be talkin’ real money.
The catalyst, once again, the ongoing sub-prime mortgage collapse.
Hedge funds are leveraged to maximize gains. Of course, this also maximizes losses.
As the mortgage backed securities market is not liquid, like the stock market, there are not daily trades to use as a reference point for determining current market value. So, securities are carried at cost, or some other value, that cannot be realized upon a sale now.
So the macro picture is for continued collapse of funds based on sub-prime mortgage securities. There is debate about how this will effect the economy as a whole.
The Fed says not to worry, now that the horses have been out of the barn for years, lending practices are being tightened, it is only a sub-prime problem, just a minor part of the mortgage market as a whole.
Let’s see, there are, what, six million sub-prime mortgages? The tightening lending standards combined with declining values will preclude most from re-financing. Most are Adjustable Rate, coming off the low teaser rates in the next couple of years.
So, if they cannot be refinanced, lenders have to take them back, then try to sell them. Real estate prices are declining, so, less chance of getting their money back. More homes for sale, supply increases, demand does not, further price declines.
Not just declines in the values of homes with sub-prime mortgages, but all homes. Most adjustable rate mortgages are not sub-prime. Hundreds of millions of dollars worth of those are coming off teaser rate this year and next. In a declining real estate market, they cannot be refinanced. Many of the mortgagors cannot afford the higher payments.
More houses for sale, more supply, lower prices.
One result? More personal bankruptcies.
If you liked that post, then try these...
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