Falling house prices shouldn’t crash the financial system, says hedge funder who bet $4 billion on 2008 housing crash


The US real estate market is experiencing one of the fastest and most dramatic changes in its history.

The reason is quite simple: soaring mortgage rates are driving buyers away across the country.

And it’s far from over. Last week, Fed Chairman Jerome Powell even went so far as to call it a “difficult to correct”.

While the the rapidity and lenght of the downturn, some Americans are worried about a repeat of the 2008 housing crisis and the ensuing global financial crisis, others are not so worried. John Paulson, the hedge funder who pocketed $4 billion betting against the US housing market in 2008, is among those who believe history doesn’t repeat itself.

“We are not at risk of a financial system meltdown today as we were before,” Paulson said. told Bloomberg on Sunday. “Yeah, right, the accommodation might be a little foamy. So house prices may fall or stabilize, but not to the extent that this has happened [in 2008].”

The Tale of Two Wall Street Oracles

Paulson, who launched his hedge fund (which has since been converted into a family office), Paulson & Co., in 1994 and has a $3 billion net worthbelieves that the housing market is on stronger footing than it was at the start of the Great Financial Crisis.

“The underlying quality of mortgages today is far superior. You don’t even have subprime mortgages in the market,” he said. ” During this time [2008], there was no down payment, no credit check, very high leverage. And this is the complete opposite of what is happening today. So you don’t have the degree of poor credit quality in mortgages that you had back then.

After the housing bubble burst in 2008 and the ensuing global financial crisis, senators adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act in order to ensure the stability of the American financial system and to improve the quality of American mortgage loans.

The act created the Consumer Financial Protection Bureau (CFPB), which is responsible for preventing predatory mortgage lending. In the years since the creation of the CFPB, the average homebuyer’s credit score has improved significantly. Before the 2008 housing crisis, the average credit score for American buyers was 707. In the first quarter of this year, it was 776, according to bankrate data.

Bank of America Research analysts led by Thomas Thornton also found that the share of buyers with what is called “superprime” FICO scores 720 or more reached 75% this summer. In the years leading up to the 2008 housing crisis, only 25% of buyers boasted such strong credit.

The Dodd-Frank Act also established the Financial Stability Supervisory Board which monitors the health of major US financial companies and sets reserve requirements for banks, and the Securities and Exchange Commission (SEC) Credit Rating Bureau which checks the credit ratings of big companies after critics claimed private agencies gave misleading ratings during the financial crisis. These two regulators have helped improve the resilience of the US financial system and banks in times of economic crisis.

Paulson noted Sunday that banks were heavily leveraged during the financial crisis and took on risks that would be considered unacceptable in today’s markets after the Dodd-Frank Act established the Volcker’s rulewhich prevents banks from making specific types of risky investments.

“The problem at that time was that the banks were very speculative about what they were investing in. They had a lot of risky, high-risk, high-yield, leveraged loans. And when the market started falling, capital quickly came under pressure,” he said, noting that the average bank now has three to four times as much capital as it did during the Great Financial Crisis of 2008, which makes them less sensitive to defects.

Although Paulson isn’t worried about a repeat of 2008, hedge funder Michael Burry, who also rose to fame predicting and profiting from the Great Financial Crisis, as depicted in the book and film “The Big Short,” has warned for years that he believes the global economy is in the “the biggest speculative bubble of all time in all things.”

Burry argues that central banks have created a bubble in everything from actions at immovable with loose monetary policies after the Great Financial Crisis and pandemic-era spending to stimulate the economy only made matters worse.

Now, as central bankers around the world shift stance to fight inflation and continue to raise interest rates in unison, the hedge fund chief says asset prices will fall dramatically.

“There is a growing risk in many sectors. The unfettered narrative thrives until the absurdity explodes, revealing the madness to all and easily sparking a revolution,” Burry said in a cryptic, since September 21 deleted. Tweeter.

This story was originally featured on Fortune.com

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Don F. Davis