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    Default API Newsletter :: October 2007

    API Newsletter :: October 2007

    Eynas Brodie

    Unless you’ve been hiding under a rock you would have heard about the subprime mess in the US mortgage industry. Naturally, when a situation goes bad in the US, some investors start worrying about what it means for us here. Will we be next?

    There are a lot of mixed views about how the subprime disaster will or won’t impact property investors in Australia, adding to the general confusion and panic, but a balanced view of the situation should keep things in perspective.

    For those who don’t know, mortgage loans in America are typically classified as either prime or subprime, depending on the risk that a borrower will default on the loan. A subprime mortgage is a mortgage given to a borrower with a less-than-perfect credit history. Interest rates are higher on subprime loans, reflecting their higher credit risk.

    Much has been said about how America came to strife, so I won’t go into it here, except to say that two of the numerous contributing factors included:
    • borrowers with bad credit histories being sold mortgages with payments that adjusted sharply higher after an opening “teaser” rate expired, and
    • lending institutions enticing mortgage brokers to sell more subprime mortgages in return for larger commissions.

    A dangerous cocktail, you’d have to agree. And one that led to an artificial inflation of house prices. An inflation that, for obvious reasons, had no hope of being sustained over the long term. As one commentator from the mortgage industry said to me, loans were being given to “practically anyone with a pulse”.

    Lending regulations are much tighter here. Not even our no-doc and low-doc loans compare with America’s subprime loans. Furthermore, while high-risk mortgages represent up to 20 per cent of the US market, they only make up 1 to 2 per cent of mortgages here. Also, lender’s mortgage insurance is generally required in Australia when the loan accounts for more than 80 per cent of the purchase price.

    While the subprime fallout may have led to a higher cost of funding for lenders, some of the bigger players here have already indicated they’ll absorb the costs rather than pass them on to borrowers. Of course, this shouldn’t concern you if your loans are locked in at a fixed rate.

    As property millionaire and author Jan Somers points out, the savvy US investor will see opportunity in America’s subprime mess and use this time to build their portfolio counter-cyclically. With the price of real estate coming down in many US markets, the conditions are set for buyers over there. As people face foreclosures on their homes, they’ll be forced back into the rental market, pushing up the demand for rental properties. To quote author Robert Kiyosaki, “…it represents a great time for bargain hunters to become genuinely richer”.

    Meanwhile, back here in Australia, we’re continuing to enjoy the fruits of a strong economy and a general upswing in the property cycle. Let’s not forget that property is, for the most part, a long-term investment strategy. There are always obstacles to overcome but the passage of time gives markets a chance to correct, and then grow. In a few months’ time, the subprime situation will more than likely have faded from the headlines and there will be another hot issue for the media to go chasing.

    We’ve got lots of news for you in this newsletter and even more in our exciting October issue of API, including the chance to win $1000 in our annual reader survey plus a special report that answers the all-important question: how many properties do you need to retire? Don’t miss it!
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


 

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