For those who do not know the meaning of risk or fear
The stock markets around the world have taken a beating the past few days because of a number of problems with the “sub-prime” mortgage market. For those of you who do not know this is a real estate mortgage market which lends money to borrowers who do not have the credit worthiness to borrow form the first tier lenders under normal rates. The companies who make these loans charge borrowers very high fees which they wrap into the mortgages. The mortgages tend to be for more than the assessed value of the property used as collateral. Generally these loans were give with no money down. Usually these loans start out at reasonable rates for 36 months then the rates move up. Borrowers and lenders have been betting on the rising appreciation of real estate to bail them out. As the value of the property rises the borrower can re-finance the loan before the higher interest kicks in. In addition these mortgages are package as high risk bonds and sold into on the international financial market. To reduce the risk the original mortgage lender pledges to buy back the bonds if a certain percent of the underling mortgages become uncollectible. Certain borrowers who speculate in real estate have used the sub-prime loans to finance their portfolio of properties. These tend to be at the low end of the real estate market, but not exclusively. About a year back these speculators have found that their prosperities are “under water” or “up side down”. That means that the value of the property is seriously less than the amount of the loan. Some speculators were in worse shape. They had rented out the mortgaged property to support the loan payments. When the rates went up the rents no longer covered the mortgage payments, taxes and any other operating costs. They went under twice.
The speculators are not stupid they defaulted on the loans. This means that there is no money to pay the people who bought the bonds supported by these loans. The bond owners went back to the mortgage lenders and asked them to fulfill their pledge to buy the loans back. The lenders filed bankruptcy. Did anybody win? Well, the people who bought the bonds backed by the sub-prime mortgages did not, but they knew the risk going in. The sub-prime mortgage lenders probably will not win. Though they made lots of money on exorbitant fees they may have to pay it all out in bankruptcy. The real estate speculators may actually win. If they didn’t have any money in the prosperities they defaulted on, if there wasn’t any fraud involved, if their legal fees in the law suits that are to come are not too high, they may have some money. It was high risk all around, but the money was attractive. You could get rich quick if you weren’t the last person in this real estate game. It was all perfectly legal and if only a few people knew about it things might work out well. The trick was not to get greedy.
What does this all mean to you? The only sure way to get rich is to get rich slowly. If it’s too good to be true it is.
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