Sub Prime : Is Real Estate Still A Viable Investment?
A sub-prime mortgage is a loan offered by lenders to borrowers with weak creditworthiness and no verified income or assets. These loans with high leverage and high risk are compensated with high interest rates.
In the United States as the viable borrowing market shrank and the seemingly endless supply of cheap credit continued, subprime lenders and brokers enticed borrowers with future unaffordable loans based on inflated housing values. Ninja (no income, no job or assets) loans, interest only loans, and other over leveraged and under securitized loan structures became common place.
These loans were pooled and placed into various structured products to be traded as mortgage backed securities. One such structured product is Collateralized Debt Obligations (CDO) which are rated by agencies like Moody's, S&P, Fitch and are finally sold to institutional investors: worldwide- mutual funds, banks, hedge funds, central banks and pension funds.
The growing world wide investors market was encouraged to speculate and fund structured products that were based on a US housing market that grew year after year. Those investments which included sub-prime structured products were sold multiple times. Government oversight was lacking. Due diligence and verification of loan pool strength was minimal or non existent. Loan default reserves by credit companies or default risks by structured products handlers were not anticipated. And rating agencies which institutional investors had grown to depend-on gave over optimistic ratings.
Highly speculative borrowing, lending and investing ignored the increasing, unaccounted risk and changing fundamentals. It remained unaddressed throughout the many layers of transactions, until now.
The calculations show growing estimates of direct losses from mortgage backed securities and CDO's. It is anticipated that US interest rates will be dropped and government or capital increase bail outs of banks are in store to sustain the sub-prime category and prevent further decline in consumer confidence and dumping of investments.
The credit crisis, caused by the sub-prime, will continue to effect the coming years. Securitization, due diligence and transparency will be key topics to the future creation of structured products in all regions related to real estate. The USA experience is a lesson for investors to be attentive to the fundamentals of real estate in particular when it is included in a structured product around the globe.
Is real estate still a viable investment category? The answer is Yes.