Falling house prices shouldn’t lead to financial system collapse, says hedge fund investor who bet $4 billion on 2008 housing crash

The U.S. housing market is undergoing one of the quickest and most dramatic changes in its history.

The reason is simple: Soaring mortgage rates are sidelining buyers across the country.

And it’s far from over.Last week, Federal Reserve Chairman Jerome Powell even called it “Difficult to correct.”

Although speed and width As for the slowdown, some Americans are worried about the bursting of the housing bubble in 2008 and a repeat of the global financial crisis that followed, others less so. Hedge fund investor John Paulson, known for his $4 billion bet on the U.S. housing market in 2008, is one of those who believe history won’t repeat itself.

“We are not at the risk of a financial system collapse today as we were before,” Paulson tell Bloomberg Sunday. “Yeah, it’s true, housing can be a little bit frothy. So house prices can come down, or they can level off, but not to the point where it happens [in 2008]. “

A Tale of Two Wall Street Oracles

Paulson, who started his hedge fund (later turned family office) Paulson & Company in 1994 and owns Net worth $3 billionarguing that the fundamentals of the housing market are stronger than they were at the start of the financial crisis.

“The fundamental quality of mortgages today is much better. There aren’t even any subprime mortgages on the market,” he said. “During that period [2008], no down payment, no credit check, and very high leverage. This is the exact opposite of what happened today. Therefore, your mortgage credit quality is not as bad as it was back then. “

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

The Act created Consumer Financial Protection Bureau (CFPB), whose mission is to prevent predatory mortgage lending. The average credit rating of homebuyers has improved significantly since the inception of the CFPB. Before the housing bubble burst in 2008, the average U.S. home buyer had a 707 credit rating. According to the data, it was 776 in the first quarter of this year. Data from Bank Rates.

Bank of America Research analysts led by Thomas Thornton also found that there are so-called “Super” FICO Score 720 or above up to 75% this summer. In the years before the housing bubble burst in 2008, only 25% of buyers had the same strong credit.

The Dodd-Frank Act also established Financial Stability Oversight Board It monitors the health of major U.S. financial firms and sets reserve requirements for banks, and Securities and Exchange Commission (SEC) Office of Credit Ratings It verifies the credit ratings of major companies after critics said private institutions gave misleading ratings during the financial crisis. Both regulators have helped make the U.S. financial system and banks more resilient in times of economic stress.

Paulson noted on Sunday that banks were highly leveraged during the financial crisis and took on risks that were deemed unacceptable in today’s markets after Dodd-Frank was established. Volcker Rulewhich prevents banks from making certain types of venture capital investments.

“The problem during that time was that the banks were very speculative about what they were investing in. They had a lot of high-risk subprime, high-yield, leveraged loans. When the market started to fall, stocks were quickly under pressure,” he said. And pointed out that stocks in ordinary banks are now three to four times what they were during the 2008 financial crisis, making them less susceptible to default.

While Paulson isn’t worried about a repeat of 2008, hedge fund investor Michael Burry, as depicted in the book and in the movie “The Big Short,” was also driven to predict and recover from the financial crisis. fame, but he has warned for years that he believes the global economy is in a “The biggest speculative bubble ever. “

Burry argues that central banks are stock to real estate Loose monetary policy after the Great Financial Crisis, and pandemic-era spending aimed at boosting the economy only made things worse.

Now, as central bankers around the world shift their stance to fight inflation and continue to raise interest rates unanimously, the hedge fund chief believes asset price will drop sharply.

“The stakes are increasing in many industries. The unbridled narrative feeds itself until the absurd explodes, revealing the folly to everyone, and easily starting a revolution,” Bury said in a cryptic remark that was deleted on Sept. 21. tweet.

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