US Home Loan and Default

According to an article on the Associated Press, mortgage insurers reported higher defaults in November 2007. As a result, the mortgage insurance companies are reporting hefty losses and share prices plunged.

The article gave a light on what we meant by “default” in US home mortgage. A default take place when a borrower failed to pay the loan for more than 60 days.

The home buyers are required to pay 20% of the house value. Otherwise, they need to take up an insurance. If a buyer missed a payment, the insurance payout will be triggered. A way get around it is to obtain another mortgage to pay for that 20%. It’s a mortgage over mortgage. With higher default risk, the financial companies are less willing to provide this second mortgage and therefore, more business for the insurance companies. With more default, these insurance companies will suffer.

US Subprime Woes - What To Do Now?

A few friends asked for my opinion when market corrected deeply due to US subprime woes. I shared my views as follow:

“This is the American’s problem, some US financial institutions are willing to earn on high risk. It has nothing to do with us. Our banks and property development are strong supported with genuine demand although price is climbing. Large portion of local bank’s housing loan are to real homeowners. The banks’ exposure to US subprime is limited to their investment arms. Most of our companies are reporting good profit which many exceeded analysts’ forecast.

Instead, we should focus and monitor on US’s economy as a whole. This is because is US enters into a recession due to all their housing problems, then global market especially that of Singapore shall follow. Demand for Singapore export will suffer and then followed by rise in unemployment rate etc.”

Lately there are more reports in Business Times on analysts sharing the same views.

- UG Investment Advisers Richard Fan said that Asian stocks' robust fundamentals were based on strong earnings growth and cheaper valuations relative to their global peers

- Standard Chartered economist opined that Asia's economy is much more robust than in 1997. The fear for Asian stocks is that foreign investment funds will have to keep offloading shares to cover losses in the US sub-prime mortgage market.

- Dong Tao, the chief economist at Credit Suisse said that “this is a US (mortgage market) problem and Asian fundamentals remain strong.” However, Mr Dong cautioned that the Asian economies depend on exports to the US, the world's biggest economy. 'The entire world is too exposed to the US, less on the financial side, more on the export side,' Mr Dong said.

- CIMB-GK analyst Kenneth Ng said that the current market sell-down runs contrary to the state of corporate earnings. Business Times reported that out of 472 companies that had released financial results for the six months ended June 07, 412 of them (87.3%) posting profits. Among them, 261 firms reported higher profits than a year ago.

- In his National Day Rally speech, PM Lee revealed that the Government projected Singapore’s growth at 4% – 6% for next five – 10 years, much conservative then private analysts. PM Lee said that the US situation may affect Asia over the next few months but fundamentals in Asia remain strong and so too for Singapore.

So what to do now?

In my opinion, we should monitor and focus on the fundamental, i.e. US economic growth instead of following the stock market sentiments. I do not discount the possibility that US housing problem could escalates into a wide scale economic problem. Our investment decision will be impacted if US economy slows down or, in worse case, enters into a recession. Last year, George Soros predicted a recession in 2007. We still have a few more months to go.

US sub-prime problem

I've been asking this, "what has the US's domestic problem got to do with us"? Unless US economy is heading to a new recession (last year, George Soros predicted this year to be a "recession year"), really what has US sub-prime loan problem got to do with us? For one thing, Berkshire Hathaway has just reported 33% profit jump.

1) Our bank's exposure is not in term of loan to homeowners but their investment arms. However, it is the unit trust holders that may get the pain, not the bank. Good bank never gamble, they just sit back and collect commissions (in many forms). That itself is enough to make them rich.
2) Asia, especially Singapore market, particularly the oil & gas sector, marine, construction & property, steel etc are doing good.
3) As expected by many analysts, including myself, many companies are submitting good interim/final report this month. Particularly the construction, steel & marine sector.
4) Jurong island continued to be as busy as little bees.

If the concern is only about market sentiment, then for those who doesn't time the market, there is really no worry. I choose not to run away. If the market continue to head south, then it's time for shopping spree. I have the following questions and would welcome your kind input:

1) This US sub-prime mortgage issue, we are not talking about mortgage-backed securities issued by Ginnie Mae or Fannie Mae, am I right?
2) If yes, then there is no much a worry locally. Because If I'm Wee Choo Yaw, I would want high weightage on MBS issue by the government agencies then any others. I will fire any fund manager who has heavy weight on junk bonds.
3) If I'm wrong on 1) above, then you are saying that US Government is going to default commitment to investors?