US Home Loans vs. Indian Home Loans

Swaminathan S Anklesaria Aiyar in The Sunday Times has written a great article by reasoning why a Subprime mess is not likely to take place in India. Is this definitely an eye opener.

Read the article here.

Also, I feel he’s a great writer and some of his earlier articles are also gems. So please find the list of other articles here.

Here’s a small excerpt.

A housing boom-and-bust has engulfed the US financial sector in crisis. India, too, has experienced a runaway real estate boom, which in a few areas is going bust. The share prices of real estate companies have crashed. Yet, India has no mortgage crisis or financial sector crisis.

Why not? Mainly because of the huge amount of black money in Indian real estate. This has saved the Indian financial sector in unexpected ways. Traditionally, US mortgage lenders checked the creditworthiness of borrowers, and then made the borrower pay at least 20% of the house value, loaning the remaining 80%. So, even if the price of the house dipped, it would still be higher than the bank's loan, and the borrower had an incentive to repay it.

Also if I may add, buying a house in India involves a lot of sentimental factors associated with it. The strong family ties, concept of a joint family or living with your parents also serve as a deterrent to just switching houses or walking away from one. While the amount of black (illegal) money in circulation in India is certainly not advocated it’s an interesting outlook into how the home loan market in India works.

On Financial Independence

Laura Rowley in Yahoo Finance has written an excellent piece on financial freedom and how to use it responsibly. I think it's a must read. Here's the link.

One of the interesting excerpts from the passage:

A study by Thornburg Investment Management in Santa Fe, found that from 1976 to 2006, $100 invested in the S&P 500 in a taxable account would have grown to $3,225 -- a 12.26 percent nominal rate of return.

Factor in fees, taxes, and inflation? The real rate of return is a meager $456, or 5.19 percent.

Something on the same lines I had written some time back can be found here.

Is JP Morgan in a Quagmire?

Mr. Jamie Dimon, Chairman and Chief executive of JP Morgan recently raised the bid price for Bear Stearns to $10 a share which takes the bid to $2.1 billion. This is supposed to be a fair deal, or at least fairer than the last offering, much to please the investors and the employees. But still a third less than the valuation on March 14, 2008. Valuations and the actual crisis at Bear Stearns aside the earlier valuation of $240 million or so was really a joke for a firm like Bear Stearns. The bailout by the Fed will be in end be financed by American tax payers money. One can argue that the actual fall would have been even more damaging to the American financial system.

Bear Stearns currently owns $30 billion of least liquid assets out of which $29 billion will be financed by the Fed and JP Morgan will bear losses of $1 billion. JP Morgan already has set aside $6 billion for lawsuits and merger costs. This is three times more than the cost of acquisition itself . Besides being big in home equity loans (read subprime mess), it is number one in the US in Credit Default Swaps. This really should be worrying.

What is a Credit Default Swap (CDS) anyway?

It’s an agreement between two parties to take responsibility for the credit risk for a third party entity can offer.

Alright, so what does it mean?

For a buyer:

A buyer will pay a periodic fee to a seller of a CDS to offer him protection in case a third party is to default on a payment. This offers him guarantee that his liability over this credit risk is limited.

For a Seller:

In case a third part defaults on credit taken the seller of a CDS has to pay the buyer of a CDS with whatever sum agreed. The seller here can either take over the defaulted credit position or pay upfront to the buyer of a CDS whatever is the difference.

Mr. Dimon has sure has a tough task at hand at merging Bear Stearns and keeping his own firm in sound financial health.

Time magazine here has an excellent write up regarding a potential CDS crisis.

Timing the Stock Market

The money blog fivecentnickel which offers smart ways to invest and make money has pointed out a great excerpt from the book The Bogleheads' Guide to Investing which offers practical advice to investing where some real luminaries share their thoughts about timing the stock markets and by the look of things it’s definitely not a good idea.

“I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

Warren Buffett, CEO of Berkshire Hathaway

“Market timing is a poor substitute for a long-term investment plan.”

Jonathan Clements, Wall Street Journal Columnist

“Market-timing is bunk.”

Pat Dorsey, Director of Morningstar Fund Analysis

“I’ve learned that market timing can ruin you.”

Elaine Garzarelli, Stock Investing Analyst

“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen in the stock market.”

Benjamin Graham, Investor and Author of The Intelligent Investor

“The market timer’s Hall of Fame is an empty room.”

Jane Bryant Quinn, Columnist and Author of Smart and Simple Financial Strategies

So still think you can get away with timing the markets?