The short sellers put up collateral, agreed to pay dividends, and paid a small amount of interest. These middle-men companies took a big slice of the earnings.  The 401k funds got only a little,  but did not complain because they thought it was essentially a risk free source of extra money.

Unfortunately, the middle-man companies overseeing the transactions got greedy, and started investing the collateral in commercial paper, instead of safer T-bills.  When the financial crisis hit, and Lehman Brothers went bankrupt, there was a panic in the commercial paper market, and some of the invested collateral suffered losses.

These Wall Street firms then passed the losses onto the funds.  Ultimately, it was the “little guy retirees” who are paying the price.  Effected S&P 500 funds, for example, lagged their benchmark index by 11 basis points (0.11%) before fees.  Mortgage-backed funds lagged by up to 53 basis points (0.53%).

Even though these losses caused by poorly invested collateral are insignificant compared to the overall loss in the mutual funds (e.g. the S&P 500 index lost 36% in 2008), they still angered some investors – who have filed class action law suits.

Overall, this situation seems to be limited to mutual funds.  People with brokerage accounts who buy individual stocks do not have to worry.  All the major brokerages keep 100% of any fees from lending securities to short sellers.  In return, they cover any losses.

Today stock loans are very popular.   Since the financial markets have been turned up-side down and banks are not lending, one method of financing has gained a lot of attention – securities based lending.

Click here for information about Non-Purpose, Non-Recourse Lending

Securities Lending is a long-established process.  In fact, hundreds of successful stock-lending transactions have been executed involving the American Stock Exchange (AMEX), National Stock Market and Small Cap Stock Market (NASDAQ), New York Stock Exchange (NYSE), Over-the-Counter Bulletin Board (OTCBB), and certain foreign exchanges.

For those with money invested in marketable securities, there is a safe way to leverage their assets and take advantage of the golden opportunities now available to cash-in on terrific RE investment opportunities which are available today.

If you are a forward-thinking investor who wants to retain the future ownership of your assets as well as leverage the present value of your securities for immediate cash needs, securities lending (also known as stock loans) can be a terrific program.

Securities base loans are –

·         Simple & Quick – NO Credit Check / NO Income Verification / NO Upfront Fees / NO Closing Costs / NO Personal Guarantee

·         Loans are “Non-Purpose” – loan can be used for virtually anything borrower wants to accomplish (personal or business)

·         Loans are “Non-Recourse” – giving the borrower the opportunity to simply “walk away” if the collateral falls below a set floor amount

·         High Loan-to-Values – up to 80% LTV (depending upon security); which is much higher than banks and brokerage companies can offer

·         Loans are Interest Only – principal payment at maturity; otherwise loans can be refinanced or extended

·         Low Fixed Interest Rates – usually between 2% to 4%

·         Loan Term – minimum of 3 yrs; also 5 yr / 7 yr / 10 yrs

·         Quick Funded – usually within 5 to 7 business days

Click here for information about Securities Based Lending

The three primary rating agencies; Moodys, Standard and Poors, and Fitch made “negligent misrepresentations” to the pension fund. The agencies’ ratings “proved to be wildly inaccurate and unreasonably high.” Calpers goes on to say that the methods used to assess these securities were “seriously flawed in conception and incompetently applied”.

It has been my contention all along that this group is by far the most culpable in this affair, because they took perfectly lousy financial instruments and slapped triple A ratings on them; the equivalent of United States Bonds. These complicated instruments that only the most sophisticated financial engineers could understand, were pushed onto countries, cities, municipalities and large pension funds as the greatest and safest investment since the United States Savings Bond, yet they were the farthest thing from safe. Most of these instruments have now lost ALL of their intrinsic value.

It wasn’t until the three credit agencies set their stamp of approval on these incredibly risky investments that the mortgage backed securities boom on Wall Street exploded. Wall Street entrepreneurs sold their new product to anyone looking for a larger annual return.

After they were sold, the inflow of money (billions or more likely trillions of dollars) was then funneled back to mortgage lenders like Countrywide and New Century Mortgage, who were busy underwriting these risky high yield, subprime loans; the key element within the financial instruments that the giants on Wall Street were so successfully selling. In other words, the securities were selling like hot cakes and Wall Street couldn’t get enough mortgages to back them, and so they pushed their lending partners to create more loans no matter how risky. Why….because they already had them sold to China, Calpers, cities in Norway, etc….. and why were they so easy to sell….. because Moodys, and Fitch, and Standard and Poors were slapping triple A ratings on them…. the highest rating possible.

It makes one wonder why Calpers, who has probably some of the most sophisticated financial experts in the industry, could not detect the risk in these securities? The reason was because of their opaqueness.

The information about what was inside of them was kept hidden from the buyer under the guise that “the securities in these packages were considered proprietary and unavailable for review”. Hence the triple A rating was the key measuring gauge the investor had, to determine the risk in the product that they were buying.

Furthermore, Calpers contends in their suit that the rating agencies were not only responsible for inaccurately rating these financial securities, but that there was an “inherent conflict of interest”, since they were actually paid by the companies issuing the securities.

Finally, the insidious behavior of these institutions reached a new ethical low when Calpers revealed in their lawsuit that the agencies themselves actually assisted, for a hefty fee, those who were creating these securities, so that they would produce a product that would receive the prestigious triple A rating.

No wonder Calpers decided to sue the rating agencies. My only question is what took them so long?

Furthermore, why hasn’t a criminal investigation been initiated? There are people and corporations out there that are undeniably responsible for our financial mess, and in my opinion, should be held accountable. After all, as financial agents they have a fiduciary responsibility to the public, and by issuing triple A ratings on these securities they not only abandoned their responsibility, but assisted in the meltdown of our global economy.

In this time of re-regulating the banking industry, and trying to create laws that would prevent a similar situation, if we do not address this conflict of interest, between Wall Street and the agencies that rate their financial instruments, we are certain to repeat the mistakes that led us into this current financial crisis.

*primary source The New York Times July 2009

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No one can predict mortgage rates precisely, but if you pay attention to a variety of factors, you may begin to notice a trend.  Unfortunately, even keeping an eye on the trends in mortgage rates will not tell you exactly when it is the best time to lock in a rate.

While it may be impossible to guarantee that you are locking in the lowest available rate, you can get a good interest rate by paying attention to the market and knowing what to look for.

Click here for information about Non-Purpose, Non-Recourse Loans

In the past, it was much simpler to predict mortgage rates.  They would typically follow the interest rates of corporate bonds, but lag behind by anywhere from six months to a year.  And while this would not make it possible to determine the exact mortgage rate, it would provide some insight into whether mortgage rates were trending up or down.

This method was very effective when a bank or credit union made a loan and held that loan for the duration of the term.  Today, that is not how lending works.

A mortgage is originated at a local bank, but it is then bundled and sold.  Because mortgages are now considered investment vehicles, it is important that the interest rates be competitive enough to attract attention from potential investors.  The mortgages are pooled into an investment group called mortgage backed securities.

These securities have the same type of appeal as bonds, and the interest rate is typically comparable to that of a ten-year treasury bond.  While the interest paid on a mortgage-backed security is higher than that of a ten-year Treasury, they will typically follow the path of the Treasury bond.  For example, if interest rates for Treasury bonds drop, expect mortgage rates to drop as well.

Another consideration for predicting mortgage rates is the current rate of inflation. When inflation gets higher, mortgage rates go up too.  And conversely, low inflation rates usually mean lower interest rates.  There are, however, exceptions to this rule. If the federal government is working to stimulate the economy, mortgage rates may remain artificially low, even as inflation rates increase.

Finally, look at what large, national lenders are doing.  Although there is no reason to expect all lenders to follow along with what these large lenders do, they often do.  The business section of your local newspaper will probably tell you everything you need to know about what lenders are doing across the nations.  Depending on where you live and the economic climate, you may see similar results within days or weeks.  While the mortgage rates may not be the same, the trend will be.

While following these basic rules will give you an edge over less informed consumers, there are other factors that will affect your personal mortgage rate. Lenders look at individual borrowers when determining what rate they offer to a customer.  A person seeking a mortgage that has exemplary credit, a hefty amount of money to pay for a down payment and some extra cash to pay on points will have a lower mortgage rate than someone who has some blemishes on their credit, little money for their down payment and not enough extra money to pay any points.

It is also important to understand the difference between a fixed rate mortgage and an adjustable rate mortgage.  Fixed rate mortgages are typically higher than adjustable rate mortgages.  The adjustable rate mortgage may seem like a better deal, but often the adjustable rate mortgage resets at a higher rate than the fixed rate mortgage.

It is important not to waste too much time worrying about mortgage rates.  While we all want to save as much money as possible when buying a home, at some point you have to make the commitment to invest the money and close on the loan. While it may seem like a mortgage is a lifetime commitment, in many cases it is possible to refinance a mortgage.

If mortgage rates drop, speak to your lender.  Some lenders will expect you to go through the entire lending process again when refinancing, while others will allow you to refinance without a new appraisal, deferring many of the closing costs.  If your lender seems unwilling to work with you on this, shop around.  You may find a better deal, or you may find that your current lender is more willing to work with you in an effort to keep your loan in house.

Click here for information about Securities Based Lending / Stock Loans