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



The US housing market is going through 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 “Hard to fix.”

While speed, velocity and width While some Americans are worried about a repeat of the 2008 housing bust and the global financial crisis that followed, others are not. John Paulson, the famous hedge fund investor who pocketed $4 billion when betting on the US housing market in 2008, is among those who believe history doesn’t repeat itself.

“We are not at risk of collapse today in the financial system like we were in the past,” Paulson told Bloomberg on Sunday. “Yes, it’s true, housing can get a little foamy. So housing prices may fall or they may stabilize, but not to the extent that it happened [in 2008]. “

A Tale of Two Gods on Wall Street

Paulson, who started his hedge fund (later converted into a family office), Paulson & Co., in 1994 and boasts net worth 3 billion dollarsbelieves the housing market is growing stronger than it was at the start of the Great Financial Crisis.

“The basic quality of mortgages today is far superior. You don’t even have any subprime mortgages in the market,” he said. “During that period [2008], no upfront, no credit check, very high leverage. And it’s the exact opposite of what’s happening today. So you don’t have the level of poor credit quality on the mortgages you did at the time. “

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

Action created Consumer Financial Protection Bureau (CFPB), whose mission is to prevent predatory mortgage lending. In the years since the CFPB was established, the average credit rating of homebuyers has improved significantly. Leading up to the 2008 housing bust, the average U.S. homebuyer’s credit rating was 707. In the first quarter of this year, it was 776, according to data from Bankrate.

Bank of America Research analysts led by Thomas Thornton also found that the buyer share has the so-called “Super Standard” FICO Score from 720 and up reach 75% this summer. In the years leading up to the 2008 housing bust, only 25% of buyers boasted similarly strong credit.

The Dodd-Frank Act also established Financial Stability Oversight Council monitor the performance of major U.S. financial companies and set reserve requirements for banks, and The Securities and Exchange Commission (SEC) Credit Rating Office which verifies the credit ratings of major companies after critics allege that private agencies gave them misleading ratings during the financial crisis. Both of these regulators have helped improve the resilience of the US banking and financial systems during times of economic stress.

Paulson noted on Sunday that banks were highly leveraged during the financial crisis and taking on risk was deemed unacceptable in today’s market after the Dodd-Frank act established Volcker’s Rulethis prevents banks from making certain types of risky investments.

“The problem is that during that period, banks speculate a lot about what they invest in. They have a lot of subprime, high-interest, risky loans. And when the market started to drop, equity quickly came under pressure,” he said, noting that the average banks now have three to four times more equity than they did during their lifetime. The Great Financial Crisis of 2008, which made them less susceptible to defaults.

While Paulson isn’t worried about a repeat of 2008, hedge fund investor Michael Burry, who has also made a reputation for predicting and profiting from the Great Financial Crisis, as described in the book and movie “The Big Short,” warned for years that he believed the global economy was in a “The biggest speculative bubble of all time. “

Burry argues that central banks have created bubbles in everything from share arrive Real Estate with loose monetary policies after the Great Financial Crisis, and spending during the pandemic to boost the economy only made things worse.

Now, as central bank officials around the world shift their stance on fighting inflation and continue to raise interest rates in unison, the hedge fund manager argues. property price prices will drop dramatically.

“There are growing risks in many areas. The unchecked story feeds on itself until the absurd explodes, revealing the madness to all and easily starting a revolution,” Burry said in a cryptic story, having deleted on September 21 tweet.

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