Who's Smart?
People who bought too much house with too much mortgage were viewed as having little financial acumen. Maybe it's the smart money who's lacking the financial savvy. A borrower with little equity and a low payment can easily walk away from his obligation when a rate reset causes the monthly mortgage payment to jump and a new valuation reveals no equity. The smart money, like Bear Stearns, cannot walk away, no matter how much they want to. They have invested and borrowed too much, and now the stakes are too high. I do believe the subprime mess is going to get worse, unfortunately. The near-term financial landscape is going to change. Rising subprime mortgage defaults and devalued housing prices will impair now-healthy parts of the mortgage and housing market. Home mortgage ills will spread to other debt sectors - i.e., commercial mortgages, high yield debt and emerging market debt - that will lead to a global reevaluation of pricing and risk. Easy credit is over. Lenders are lemmings. Many people and businesses (and politicians, but that is another post) benefited when credit was easy, now many good borrowers will be punished for banks' overreaction and herd mentality.