by Judy Joyce

Created on: October 18, 2008   Last Updated: October 20, 2008

WAIT TO BUY HOUSING: Credit Default Protection Needed to Loosen Lending Liquidity Thoroughly.

When FDIC Chair, Sheila Bair, appearing on Charlie Rose television interview program. Friday - October 17, she discussed at length her hopes for an end to the current financial crisis. In that Ms. Bair heads up the Federal Deposit Insurance Corporation, the interview touched on the issues related to housing market declines and whether or not an end was in sight. Ms. Bair focused nearly exclusively on what role the FDIC could play in the shoring up of what she called a continuing loss of trust between deposit banks and financial banks dealing in investment instruments. While mortgages are being bundled as investment instruments, it is also true that a mortgage can be purchased through a deposit bank by individuals needing a home.

Ms. Bair went on to point out that despite part of the new Bailout package to financial banks in trouble with liquidity, depositors should not confuse that notion with deposit banks that are in fine shape and basically sound. Her most interesting analysis, I believe, centered around the explanation of continuing stagnation in credit markets tied to two things: Credit default protection and transparency in interlocking credit contracts. These two additional factors can influence whether or not one might consider waiting on purchasing a house just now in a still unstable market. These issues effect the mortgage industry in the following way.

CREDIT DEFAULT PROTECTION: Because banks borrow back and forth from each other in the everyday transactions of providing credit, it is important to trust that if one institution lends to another, come pay back time, the lending bank gets it's payment. In that there is no transparency in financial institutions (except the double down regulatory effect of State and Federal regulations on how banks operate except regs regarding their individual depositors which is a narrow aspect of a global market), the present meltdown has frozen credit as between banks. Institutions are reluctant to trust each other.

When the government now comes forward with the bailout money, they are also doing this as an incentive that those banks re-finance bad mortgages.The banks question whether or not the person on Main Street who is already having trouble meeting their mortgage obligation, might not just default again. To protect themselves against new mortgages going bad, banks want the FDIC to insure them against losses on the new round of mortgages by issuing credit default protection.

Interlocking debt servicing applies to notions that those getting mortgages also owe other debts on things like credit cards. Those other debts may be to the same institutions re-writing mortgages. On the institutional level, non-transparent institutions may gain liquidity from the government but there are no regulations in effect to keep those same institutions from making bad financial packages again.

While these problems are being sorted out with new regulations, no one knows the "moral hazard" yet. The moral hazard is related to something like collateral damage in a war. No one knows if this will turn out for the new home buyer as intended no matter how well intended new regulations are. For this reason, I would wait to buy that house you are interested in despite lower and lower prices. The risk to your investment is not so much at risk as an investment always is as the state of these new mortgages opportunities is unsettled as yet. As the lowest person on the totem pole of this mess, I wouldn't want to be part of that collateral damage if I could avoid it. This is one of those times.

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