SUBPRIME???
Disclaimer: As always AND before I go on , I’m not offering financial advice; you should always get qualified professional advice when making financial decisions. What I am doing is letting you know what has worked for me and giving you the opportunity to check it out for yourself. This mesage is intended to provide general news and information only. Readers should rely on their own enquiries before making any decisions regarding their own interests. Please do not rely on any part of this mesage as a substitute for specific legal or financial advice. All material is copyright 2008
I WAS HAVING A DISCUSSION WITH ONE OF MY SUCCESS TEAM MEMBERS SPECIALIST RECENTLY AND I THOUGHT THAT YOU WOULD FIND AN ARTICLE HE SENT ME TODAY OF INTEREST… PLEASE READ ON!
July 2007 – Most of us had never heard of the word Subprime. The American Dialect Society chose Subprime as their 2007 word of the year. Even as I type this my computer does not recognize Subprime as a word.
As we watch our portfolio’s shrink and shudders run through the markets of the world, we all nod our heads and realize that Subprime is not a good thing, but do many of us actually understand why this is affecting all of us and our investments so negatively.
The basic premise is that in the US, banks and other lending institutions organized loans to people of questionable financial standing. Subprime is the more politically correct term for loans given to people who should not been offered credit. Ninja is another term – No Income, No job, No Assets.
Why did these people get loans? At a base level there was a disconnection between the people providing the finance and taking the risks and the people making the lending decisions. The only reason these loans were written was for mortgage brokers to hit sales targets, they were getting paid on volume not the quality of the loans written. Loan securitization bundles together large volumes of home loans to form an investment vehicle. These Subprime loans were grouped together and investors attracted to the higher returns did not understand the lack of quality in these loan books. The key principal of any loan business, (will I get my money back) was ignored. In the middle of 2007 when the low – interest honeymoon rates came to an end, clients who had listed their occupations as ’unemployed’ and their financial position as bankrupt clients started defaulting on these loans. Securities backed by Subprime mortgages were sold and backed by the investment banks of the world. Investors had the option to return the securities to the banks if they weren’t satisfied.
Of course when things went South on large numbers of these loans this is exactly what they did. Although the US Government stepped in to try and keep interest rates low, the bad loans kept on defaulting. The final cost of this crisis could be as high as $US 600 billion if you factor in the falling US. House prices and lower consumer spending.
Now we are all indirectly paying for these mistakes. From a wholistic economic point of view this has been a massive waste of financial resources. Secondly now all lenders are under suspicion. The reaction of many financial institutions has been to stop lending money, rather than scrutinizing who they were lending to. Strange things happen when fear takes over. Companies with high debt levels (in Australia read Centro, MFS, Allco, ABC etc), particularly if the loans needed refinancing in the short term, found that they could no longer get the refinancing to continue their commitments.
Higher interest rates by way of a risk premium flows through every borrower, uncertainty and fear drives people into financial hiding cashing in their investments and hiding the money under the bed.
The thing to remember is markets do recover…
- from the Crashes of 1929 and 1987,
- the Oil Crisis of 1972,
- Sept 11, 2001attacks
the market has always eventually gone up. History says it will go up again.
THE BIG QUESTION IS WHEN…
but patience is the key to waiting around till it does.
Yours with Ethics and Passion
George Mihos,
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