«

»

Jan 28

The Explainer: Subprimal scream

That was a scene from the Christmas episode of “Boston Legal,” where Alan Shore takes up the cudgels for a colleague, who faces eviction during the holidays. The reason? The subprime crisis has forced banks to suddenly raise interest rates on housing mortgages.

Now this is a fictional story, but it mirrors real stories and mounting global concern.

What’s all this business about the subprime crisis? What’s it all about –and how could it affect us? That’s our task on the Explainer tonight.

I’m Manolo Quezon.

 

I. Spending like sailors

 

Over the holidays, Balikbayans almost always remarked at how the landscape’s changed so much, in the time they’ve been away. Quite a few said this even as they inspected properties they’d bought with their hard-earned cash. It’s not that there’s many more of us, all trying to find property, although that’s true, too. It’s also that, with so much foreign hard currency in so many hands, so many more of our countrymen can finally buy property, too.

This isn’t the first time this has happened. It happened in the 1990s, until the Asian Financial Crisis struck.

At one point, in the 90s, the property market in Cebu, for example, was so hot, that when one person called a broker to inquire about the price of some property, the broker replied, “it depends on what time you ask me about the price.” The price of land was literally changing from hour to hour.

Two economists have made interesting observations about the ongoing real estate boom in our country. Some months ago, you may remember seeing this slide.

It was part of Cielo Habito’s presentation, which he gave on this program.

Recall that he pointed out we’d lost jobs in some sectors. But these losses were compensated for by the gain in employment in other industries. He paid particular attention to the construction industry, fueled by the property boom.

Now the party isn’t over, but no party lasts for ever and we have to ask, is the party winding down?

Someone working in a big property firm told me their sales were fueled, in large part, by a generation of Filipinos who’d gone to work abroad in the 70s, and who were now reaching retirement age.

The importance of this market can be seen, for example, in Inquirer.net, which has lots of ads marketing condominiums, townhouses, and new houses in new village developments. All targeted at OFWs and Filipino-Americans.

Lately, however, I’ve begun to hear that there’s a bit of a slowdown in sales, and that’s because Filipino-Americans, in particular, are concerned over the subprime crisis in the USA, which has spilled over to Europe.

Indeed, voices have been raised, for some time, warning about the possibility the world’s facing the consequences of a recession in the USA. The potential trigger? The subprime crisis.

http://www.americandialect.org/index.php/amerdial/subprime_voted_2007_word_of_the_year/

 

For 2007, the word of the year, according to the American Dialect Society, was “subprime.”

Subprime is an adjective used to describe a risky or less than ideal loan, mortgage, or investment.

So to begin looking at this subprime business, I thought we’d do another of our patented low-tech Explainer demonstrations.

It begins with wanting to buy a home. Like this one.

You could pay for it in two ways. You could pay in cash, or you can borrow and then pay off your debt.

Let’s ask our guest to join us, and explain two key concepts:

Mortages.

Equity.

And what contributes to cheap and plentiful loans?

 

And once a boom is going, it means that the support for it, low interest, lots of credit, new developments, are all available?

So in the USA, all these things meant more people were able to buy homes, and more homes were up for sale, and lots of people wanted to lend you the money to buy a home.

So what we have here is even people who normally wouldn’t get loans, started getting them.

And quite a lot of them did so, on the basis of cheap interest.

So you and I know what a housing boom is like. Where things are slightly different for us, is we’re not a mortgage-driven home owning society. But the subprime crisis is more than about defaults on mortgages, it’s about high finance.

Somewhere, somehow, credit tightened up. Loans were called in, or interest on those loans began to spike. How this happens, how the meat of the matter, as far as subprime lending’s concerned, when we return.

 

II. Calling in the bills

 

That was another scene from the Christmas episode of “Boston Legal.”

In the first part of this show, we saw how there was so much credit available, that banks began lending money to people who normally wouldn’t get mortgages.

Now something happened, to make people panic over this situation. What happened?

Let’s start by asking our guest to explain to us some key concepts.

Buying debt.

Liquidity.

CDO.

Central Banks.

So now let’s tackle how all these concepts come together to form a subprime crisis.

Here we are. You’re a banker, here are houses with mortgages. I’m a credit ratings agency, being relied upon by you, the banker, and all sorts of other people.

And now, at a certain point, the Central Banks start pumping cash to keep the banks going? Because they won’t lend money to each other?

Now that we’ve seen how the system got derailed, what next?

The potential repercussions of the subprime crisis, when we return.

 

My view

 

Money, as they say, makes the world go ‘round.

Every Filipino who invests earnings in property, becomes a citizen for whom life, liberty, and property, are tangible. In other words, someone who has a solid stake in our nation’s future. But as I’ve mentioned here before, opportunity is no guarantee. You may buy a home, but it doesn’t mean you’ll always get to keep it.

We have a booming property market, but we need to ask, not is the boom going to last, but rather, what happens when it ends? Satisfaction over the property market can have unintended consequences.

I’ll give you an example of the unintended consequences of the property boom. One person familiar with the market told me, the growing number of overseas Filipinos who’ve bought condos and other property, for investment purposes, is that developers have sold lots of property, but each sale involves a continuing obligation.

A condo owner, or any property owner, has to keep paying condo and association dues, and taxes to the government. But absentee owners can overlook these things, which then puts the finances of developments out of whack.

We like to think property is one of the safest investments there is. Whether value will go up, and not down, of course depends on a lot of things. If your government is careless, incompetent, or crooked, who, then, will uphold your property rights, in the face of trespassers or criminal syndicates? And there is such a thing, as paying too much, in the expectation that prices will always be sky high.

Leave a Reply