Falling home prices shouldn’t collapse the financial system, says hedge funder who made $4 billion betting on the 2008 housing crash

The US housing market is undergoing one of the most rapid and dramatic changes in its history.

The reason is pretty simple: Rising mortgage rates are putting off buyers 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 correction.”

While the speed and breadth of the slowdown has some Americans worried about a repeat of the 2008 housing bust and subsequent global financial crisis, others are not so concerned. John Paulson, the hedge funder who in 2008 pocketed $4 billion in bets against the US real estate market, is one of those who believe history won’t repeat itself.

“Today we are not at risk of a collapse of the financial system like we were before,” Paulson told Bloomberg on Sunday. “Yes, it’s true, housing can be a bit frothy. So house prices can go down or stay down, but not to the extent that it happened [in 2008].”

A tale of two Wall Street oracles

Paulson, who started his hedge fund (which has since become a family office), Paulson & Co., in 1994 and has a net worth of $3 billion, believes the market for the house is on a more solid foundation than at the beginning. of the Great Financial Crisis.

“The underlying quality of mortgages today is much higher. You don’t even have a subprime mortgage in the market,” he said. “In that period [2008], there were no down payments, no credit checks, very high leverage. And it is the complete opposite of what happens today. So you don’t have the degree of bad credit on the mortgages that you had at the time.”

After the bursting of the housing bubble in 2008 and the subsequent global financial crisis, senators passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to ensure the stability of the US financial system and improve the quality of US mortgages.

The act created the Consumer Financial Protection Bureau (CFPB), which is charged with preventing predatory mortgage lending. In the years since the CFPB’s inception, the average credit rating of home buyers has improved dramatically. Before the housing crisis of 2008, the average credit score for US homebuyers 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 so-called “superprime” FICO scores of 720 or higher reached 75% this summer. In the years before the 2008 housing crisis, only 25% of buyers boasted similarly strong credit.

The Dodd-Frank Act also established the Financial Stability Oversight Board, which oversees the health of major U.S. financial firms and sets reserve requirements for banks, and the Commission’s Office of Credit Ratings Securities and Exchange Commission (SEC) which verifies the credit ratings of major companies after critics argued that private agencies gave misleading ratings during the financial crisis. Both regulatory bodies have helped improve the resilience of the U.S. financial system and banks in times of economic stress.

Paulson noted on Sunday that banks were highly leveraged during the financial crisis and took risks that would be considered unacceptable in today’s markets after the Dodd-Frank Act established the Volcker Rule, which prevents banks from making certain types of securities investments. risk

“The problem, in that time period, was that the banks were very speculative about what they were investing in. They had a lot of risky, high-yield, leveraged subprime loans. And when the market started to fall, the capital went away. quickly see under pressure,” he said, noting that the average bank now has three to four times more capital than it did during the Great Financial Crisis of 2008, making them less susceptible to default.

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

Burry argues that central banks created a bubble in everything from stocks to real estate with loose monetary policies after the Great Financial Crisis, and pandemic-era spending to boost the economy only make things worse

Now, as central bank officials around the world shift their stance to fight inflation and continue to raise interest rates in unison, the hedge fund boss is arguing that asset prices will fall sharply.

“There is a growing risk in many sectors. Unhindered storytelling feeds until the absurd explodes, revealing the madness to all and easily starting a revolution,” Burry said in a cryptic, since-deleted, September 21. tweet

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