Thursday, January 10, 2008

When will the mortgage crisis end?

Interesting column here from Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania. I found this column online but it was distributed by Inman News. He doesn't actually predict when it will end, but he does say how:

This semi-paralyzed market will continue until investor confidence is restored. Key players are the investment banks and hedge funds who sold MBSs when prices were high in expectation that they could buy them back later at lower prices. At some point, they must go into the market to cover their short positions. They will do that when they decide that MBS prices have reached a bottom.

That will not happen before we see the end of unpleasant surprises -- large value write-downs by major U.S. firms and revelations by previously unknown foreign institutions in trouble because they, too, bought subprime-contaminated securities. Most firms come clean at year-end, so perhaps the surprises will stop soon.

Once the surprises stop, investors will look for a bottom in house prices and a peak in foreclosures. When both become clear, they will make their move.

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