Anyone wondering who funds all the high-risk home loans about which I write incessantly may find a recent Financial Times piece enlightening. The FT article tells us what’s on the minds of correspondents from the enigmatic world of structured finance, that seemingly endless supplier of funding to (among others) ever more questionable home buyers.

I recommend reading the entire piece, but the long and short of it is that many folks in the business fear that the current appetite for risk is anything but sustainable. The only reason things have gone this far, the insiders maintain, is that a “frightening degree” of leverage has combined with widespread underestimation of the credit risk hidden within the inscrutable depths of modern-day credit derivatives.

The article wraps up with an implied question: are we in a new era of permanently low risk-aversion, or will credit market fear eventually come roaring back as the concerned insiders suggest? Only time will tell. Now that mortgage delinquencies are piling up, perhaps the wait won’t be long.

Readers who aren’t completely bored at this point may wish to check out an earlier piece I’d written about how the sub-species of credit derivatives known as credit default swaps exert a real influence on our housing market.

— RICH TOSCANO

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