Trooper_IHB
New member
Interesting article from RealtyTrac here.
From an investor’s point of view, the default rate for prime loans is not quite what it seems. Yes, bigger losses are a problem, but there are other concerns as well.
A large and growing portion of the American economy is financed by overseas dollars. If you’re an investor and live outside the U.S. then you have a number of ways to make money with American assets.
Imagine if you buy prime mortgage-backed securities worth $75 million that pay 5 percent interest. If you expect .5 percent of the loans to fail — loans worth $375,000 — you will still earn your 5 percent. But if fully 1 percent of the loans fail — mortgages worth $750,000 — you won’t earn 5 percent because you now have an additional $375,000 in losses.
That’s a problem, but perhaps not a terrible problem. Remember, the value of your investment is measured in dollars so in a sense your mortgage-backed security is a commodity of sorts. If you have a $75 million asset and the value of dollars increases by 10 percent against your currency then you've made $7.5 million because now your dollars buy more.
From an investor’s point of view, the default rate for prime loans is not quite what it seems. Yes, bigger losses are a problem, but there are other concerns as well.
A large and growing portion of the American economy is financed by overseas dollars. If you’re an investor and live outside the U.S. then you have a number of ways to make money with American assets.
Imagine if you buy prime mortgage-backed securities worth $75 million that pay 5 percent interest. If you expect .5 percent of the loans to fail — loans worth $375,000 — you will still earn your 5 percent. But if fully 1 percent of the loans fail — mortgages worth $750,000 — you won’t earn 5 percent because you now have an additional $375,000 in losses.
That’s a problem, but perhaps not a terrible problem. Remember, the value of your investment is measured in dollars so in a sense your mortgage-backed security is a commodity of sorts. If you have a $75 million asset and the value of dollars increases by 10 percent against your currency then you've made $7.5 million because now your dollars buy more.