Thursday, August 2, 2007

Who will be hurt?

In today's Financial Post, Reuters Published: Thursday, August 02, 2007 reported "Canadian, U.S. banks face limited subprime shocks"

NEW YORK -- U.S. and Canadian banks face limited exposure to subprime mortgage losses and future rating downgrades, bond rating company DBRS said on Thursday.

Healthy earnings should insulate financial institutions, DBRS analysts said on a conference call.

"We do not expect wholesale downgrades of banks with exposure to subprime."

Brenda Lum, who covers Canadian banks for DBRS, reiterated remarks made in a report on Wednesday that said Canada's five largest banks also face limited losses from their exposure to U.S. subprime loans.

"There are no credit rating implications for the five largest Canadian banks," Lum said.

But, home owners who bought their homes recently will not be so lucky. The reason being these home owners paid a lot more for their homes than those that bought their homes a few years earlier. Many home owners in the U.S are already facing serious problems with deteriorating house values and higher mortgage payments.

In Canada, we will not be immuned to the price correction when the housing market turn south. It's not unreasonable to expect prices to correct 15% to 20% considering house prices have gone up almost 100% over the past 6 years.

In the hot housing markets in Vancouver, Victoria, Calgary and Edmonton. there are not much up-side potential in house prices continuing to increase without a correction. The down-side risk could be devastating for many home buyers who only bought their homes in the recent months.

It's already in the news that there are likely to be another interest rate hike in September, possibly follow by another one before the end of 2007.

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