Whitney Tilson on The Subprime Bubble

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In the spirit of the upcoming Value Investing Congress which I plan on attending and reporting from, I found some interesting videos from the previous Congress in 2008 which I wanted to share. I discovered a total of 11 videos on the internet. Most of them are quite interesting, and informative.

I wrote about a brief summary of each video which I will be posting over the next few days, and embedded the video below.

It is important for context to understand that the conference took place in late 2008 at the height of the financial crisis.

In this video WhitneyTilson discusses the subprime crisis that is occurring currently and what impact it will have on value investment portfolios. Tilson gives an explanation of the ground zero of the worldwide credit meltdown and economic crisis so that investors can gain an understanding of what exactly happened and what they can expect to happen in the upcoming years. The debt bubble burst due to the fact that lenders allowed borrowers to borrow high amounts in comparison with income without documentation. Rather than borrowing three times your income, borrowers were borrowing up to nine times their income.

Tilson goes on to explain the irresponsible lending decisions where they may have known the loan would more than likely default, however they felt they would have sold the loans off by that time. Lenders also factored in costs of inflation and foreclosure and felt they could take the risk to give potentially risky borrowers loans because home prices ALWAYS ROSE so the conventional wisdom told us. Because of a large decrease in housing prices and higher amount of defaults, loans are going under and foreclosures are at the highest rate ever, up to 300,000 per month.

Housing prices are about 20% down, and one in six mortgages are underwater. Home inventory are at ten months, even though homes are selling so the numbers do not look good (quite prophetic). Projections show the mortgage market is approximately halfway finished before hitting trend line.

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