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Debt markets: The American dream turns into a nightmare

After every great party comes a reckoning. Because they overindulged sub-prime borrowers with unprecedented excess credit, US financial markets are facing a long and severe hangover. The American dream of homeownership for all has turned sour, while cleaning up the mess will be painful. Amid the finger-pointing, dislocation and illiquidity, though, fortunes will be made. Alex Chambers reports.

Online extra on challenges facing the servicing industry: Tough times for servicers 

                                                                                                              More on sub-prime


JEFFREY KIRSCH, CEO of American Residential Equities (ARE), is an extremely busy man. Not that he has ever been a slacker; it is just that his line of work is booming – his company liquidates underperforming mortgage loans. In the past 10 years, Kirsch has bought and liquidated something like $1 billion of loans. However, now he envisages liquidating a much larger amount over a much shorter time horizon.

If Kirsch is right, the prospect is of millions of homeowners being forced on to the streets, an outlook that is bound to loom large in the fast-approaching US presidential elections. Senator Hillary Clinton has already proposed a $1 billion fund to help homeowners avoid foreclosure. Pressure is building for the Federal Reserve to come to the rescue with rate cuts. Amid accusations of predatory lending practices at originators, there is talk of the need for extensive forbearance – which would allow borrowers to delay onerous monthly payments. A number of calls from Federal politicians have urged the Office of Federal Housing Enterprise Oversight to act to allow the agencies, Fannie Mae and Freddie Mac, to help support the market in some way.

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