Morgage and Default

I heard story on NPR yesterday about what foreclosures might do to the housing market and the fall out from the sub prime mortgage market. What I did not hear in this story was what a good rate of load default for mortgages or sub prime mortgages. On a personal level no one wants to default. No person wants to fail when it comes to their housing plan.

On a larger level if there are no defaults, the lending community is not taking enough risk. If there are no default there people who could pay off a mortgage that will not get the chance. The only way you can limit the risk to zero it is to only lend to people you know can pay off. The problem is that is a whole bunch of people who are risky, but will pay loans off. I would like to hear an economist talk about the theory about what an acceptable level of default.

I know that some loans are bad. From what I am reading, a lot of these loans were easy to predict they would fail. Some of these companies crossed the line into criminal activity. I do not think that is good. I do not think people should be given loans that there is no way they can pay after the teaser is over.

Living in Silicon Valley I have heard of a lot of crazy loans. I have heard of more than a few loans that are purely speculative. There are loans, like interest only loans art based on the idea that housing prices were rise and the owner will be able to see the house for a profit without paying any principle. That is a dangerous loan if the market goes soft.

I am worried after the fallout from the sub prime loan market burst, lots of people who should get loans will not. I am worried that lenders will be too adverse to risk. I think that is bad. I just do not know how much is default is a good level of risk.


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