You’re likely right that FDIC insured banks have for the most part isolated themselves from the majority on direct subprime risk. That said, I’m still convinced that eventually this becomes an issue that forces some type of federal intervention. Why?
Subprime foreclosures are currently out of control… with the problem in every way likely to get *much* worse. Moreover, most subprime borrowers are minorities. I’m convinced that the political ramifications of minority borrowers being kicked out of their homes in record numbers will be too much for the government to bear. They’re going to have to come up with some “solution”.
The other side, is that while this is happening, there is a big push to legislate that borrowers should be qualified “at the fully indexed rate”. Well, we’re 8-12 months from the biggest subprime ARM reset in history. All these borrowers are going to hit their resets and are no longer going to be able to afford their loans. How are they going to be able to qualify for new loans when they, by definition, aren’t able to afford the fully indexed payment?
The government is going to step in with the largest borrower bailout in history. There won’t be a “direct” cost to this, but debt forgivness of this magnitude can’t be done in a vacuum… a lot of people are going to lose a lot of money.
