Sunday, April 11, 2010

US Economics US Growth Outlook: Upside Risks (morgan stanley) $SPY

Upside Risk #1: Reducing housing tail risks. We have long recognized that slowing household formation, a “shadow inventory” of yet to be foreclosed homes, the likelihood of strategic defaults, and rising joblessness posed downside tail risks to home prices and housing activity.

Negative equity is the key factor. Policies to mitigate the rising tide of mortgage foreclosures have until now relied on affordability – reducing monthly mortgage payments for delinquent or at-risk borrowers.

Game changer for housing. The new initiatives will significantly lower the incentive for strategic default because earned principal forgiveness addresses the negative equity issue. While these proposals could represent a game changer, they will not magically solve our housing problems.

US Growth Outlook: Upside Risks
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