The global economic downturn has created uncertainty in employment in India as well. In such a situation, what if one has a couple of EMIs to pay, say home loan and auto loan, when the retrenchment strikes?
Like it exists in other developed countries, ICICI Lombard has introduced in India, a cover that will pay three equated monthly installments (EMIs) on any individual loan when the policy holder faces job loss. Considering the severity of the economic situation, ICICI Lombard is even reviewing the possibility of increasing the three month EMI cover.
The job loss cover is sold as an add-on cover with the company’s critical illness policy. However, one thing to be noted is that the policy does not cover retrenchment due to underperformance, voluntary resignation or early retirement. But then, it’s a great product that came at a crucial time.
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Showing posts with label Mortgage. Show all posts
Showing posts with label Mortgage. Show all posts
Friday, 27 March 2009
Tuesday, 10 February 2009
Lessons from the sub-prime crisis
On Tuesday, the US senate passed the $819 billion economic stimulus bill, the second of the rescue package for the drowning US economy. Other governments have also come up with/are coming up with such measures to counter the financial crisis.
Even while issuing such packages, neither the US senate nor the other governments across the world can say with certainty that the financial crisis will be harnessed with these. Such is the size of the crisis and one might wonder how can we ensure that a crisis like this won’t happen again? What are the lessons learnt from the financial crisis?
In the case of sub-prime securities, risks were often under-estimated due in part to product complexity and over-reliance on quantitative analysis, including by rating agencies. Thus early detection and cure, which would have reduced the spill over effects of the crisis, didn’t happen in this case. Financial institutions were trying to cover up their losses till the last moment. The failed ones got uprooted in no time.
A major factor that contributed to the crisis is the use of standard risk assessment models used by risk management professionals by which they underestimated the systematic nature of risks. To put it in simple words, if everyone uses the same techniques, every one will be affected by the same issue. Independent assessment of risks using custom developed models would be one of the key lessons to be learnt from the crisis.
Derived from, Financial Risk Management: Lessons from the Current Crisis ... So Far
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- US Sub-prime Crisis
Even while issuing such packages, neither the US senate nor the other governments across the world can say with certainty that the financial crisis will be harnessed with these. Such is the size of the crisis and one might wonder how can we ensure that a crisis like this won’t happen again? What are the lessons learnt from the financial crisis?
In the case of sub-prime securities, risks were often under-estimated due in part to product complexity and over-reliance on quantitative analysis, including by rating agencies. Thus early detection and cure, which would have reduced the spill over effects of the crisis, didn’t happen in this case. Financial institutions were trying to cover up their losses till the last moment. The failed ones got uprooted in no time.
A major factor that contributed to the crisis is the use of standard risk assessment models used by risk management professionals by which they underestimated the systematic nature of risks. To put it in simple words, if everyone uses the same techniques, every one will be affected by the same issue. Independent assessment of risks using custom developed models would be one of the key lessons to be learnt from the crisis.
Derived from, Financial Risk Management: Lessons from the Current Crisis ... So Far
Related Articles
- US Sub-prime Crisis
Wednesday, 31 December 2008
Wait! Property prices to fall further!
Here's an indepth article about real estate prices in India, from rediff.
Few points from the article,
The recent housing boom was riding on the back of four broad factors -- rising incomes, job security, low property prices and interest rates, and tax benefits associated with buying a house.
A home loan is a person's show of confidence in his income earning capacity over the long term. As the demand for high-ticket loans falls, it also signifies a dip in the confidence in job security and future salary increments.
Says an industry analyst: "Major players in the premium segment have an operating margin of 50-55 per cent. On the contrary, in the mid-segment the margin is around 35 per cent."
"A minimum of 25 per cent correction can be expected. Correction in Tier-II and Tier-III cities will happen a little more. Even cities like Mumbai could see significant price correction," adds Mavani.
So, read on!
Few points from the article,
The recent housing boom was riding on the back of four broad factors -- rising incomes, job security, low property prices and interest rates, and tax benefits associated with buying a house.
A home loan is a person's show of confidence in his income earning capacity over the long term. As the demand for high-ticket loans falls, it also signifies a dip in the confidence in job security and future salary increments.
Says an industry analyst: "Major players in the premium segment have an operating margin of 50-55 per cent. On the contrary, in the mid-segment the margin is around 35 per cent."
"A minimum of 25 per cent correction can be expected. Correction in Tier-II and Tier-III cities will happen a little more. Even cities like Mumbai could see significant price correction," adds Mavani.
So, read on!
Monday, 15 September 2008
WallStreet crumbles
- Lehman Brothers, files for bankruptcy.Complete coverage by WSJ.
- Bank of America to save Merrill Lynch from the same fate by buying it for $50 billion.
- AIG looking to raise capital; also to avoid the same fate.
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Thursday, 4 September 2008
Financial tidbits
As the world economy continues to remain blunt, in the US the subprime mortgage lending crisis is still not over despite statements from the renowned in the field stating it to be over. From this news,
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Standard & Poor’s Leveraged Commentary and Data reported this week that the default rate — the percentage of leveraged loans in default — rose to a five-year high of 3.3 percent in August. At the end of last year, the rate was a tiny 0.24 percent, or about one of 400 loans.Back in India, this news (India’s external debt jumps 30.4% to $221 Bn in FY08), though it appears appalling prima facie, might not be that bad because the increase is on account of increased borrowings by the corporate from outside and weakening of the dollar. In fact, the government’s debt in total external debt has decreased from 28.4% to 25.6%. Increased borrowings by the corporate, also called External Commercial Borrowings (ECB) could indicate an increase in investments done by Indian corporate inside India and abroad, which is actually good for the Indian Business.
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Wednesday, 21 May 2008
Sub-prime woes haunting the US
While the US bleeds of sub-prime wounds, most of the mortgages taken through sub-prime borrowing are now facing foreclosure. People who have taken such loans to build/buy houses are vacating it subsequent to court verdicts.
The gravity of the situation comes out clearly in this news reported by the New York Times. Quoting them,
The gravity of the situation comes out clearly in this news reported by the New York Times. Quoting them,
The problem of vacant homes is all the more striking when considered against predictions by economists that a couple of million more homes will enter foreclosure in the next two years, said Cheryl Lang, president of Integrated Mortgage Solutions, a company based in Houston that contracts with Mr. McCallister and Mr. Law on behalf of mortgage companies.With the consequent economic decline leading to more and more layoffs/job cuts, I guess the situation in the US is going to spiral out in the days to come. Feel like the sub-prime crisis had much more in its store than expected!
Monday, 3 September 2007
US Sub-prime Crisis
The US sub-prime mortgage lending crisis or simply sub-prime crisis has been the catchphrase in various media over the last few weeks. In this entire hullabaloo, one may want to know what this episode is all about and how it will affect the Indian economy or rather the world economy as a whole. Let’s have a look.
Sub-prime borrower
In US almost everything, right from getting a credit card to receiving various banking services, is dependent on the credit history of a person. A good credit history can be directly attributed to making payments on time, less revolving credit on credit cards, fewer payment defaults and check bounces etc. and is denoted by the FICO score or credit score of a person set by few credit rating agencies. It is easy for a person with a good credit history to get loans and other services while it’s exceedingly difficult for a person with a not so good credit history or low FICO score to avail banks’ services, let alone loans. Such poor credit history borrowers are called sub-prime borrowers. Since there is a risk of default on loans to sub-prime borrowers, US banks usually charge a higher rate of interest to them for the risk they are taking. From the bank’s side, a higher interest means a higher return, well with a risk. As a result, some banks had seen lending money to sub-prime borrowers as an opportunity.
Sub-prime boom
For a crisis to happen, first there has to be a boom. There were a few things that led to the sub-prime boom. I better quote Christian Stracke of Financial Times who had explained the situation quite nicely. “It all originated with a global imbalance between the supply of credit and the demand for credit. Global Central Bank let monetary policy move to a nearly unprecedented accommodative stance, pumping money into the system. At the same time, corporate, the traditional mainstays in terms of borrowing funds to invest moved to a defensive stance, having grown much more conservative in the wake of the Enron and WorldCom fiascos. Finally, the major developed countries began to gain a measure of fiscal discipline, with budget deficits shrinking, which further reduced the demand for credit on a global basis. That imbalance between investors flush with cash and the traditional borrowers not really needing or wanting that cash meant that investors had to look for new markets to invest in. As the Asset Backed Securities (ABS) market had been taking off and coming into the mainstream, a natural target was the sub-prime borrower - borrowers who in the past had wanted to borrow but who had been locked out of credit markets. Eager lenders met eager borrowers, with the mortgage originators, ABS underwriters, and credit ratings agencies playing the role of matchmaker, and the sub-prime boom was born.” Now, let's see what the banks or mortgage originators did to target the sub-prime borrowers’ market.
Role of Banks and Hedge Funds
So there was an opportunity among sub-prime borrowers and there has to be someone who could take the money from investors and give it to the borrowers. Who could do this better than the banks? Banks gave money to sub-prime borrowers and then they bundle the loans to a package and sold securities whose value was linked to the performance of the package of mortgage loans. Investors bought these securities and thus indirectly provided the money required for sub-prime lending. These derivative instruments are called Collateralized Debt Obligations (CDOs), which is one form of Asset Backed Securities. Thus, banks did away with the role of playing a financial intermediary. The total volume of CDOs in the US market is around $900 billion and only 17% of the CDOs were created out of sub-prime mortgages. Hedge Funds hold majority of these sub-prime related securities due to the inherent nature of their business making them extremely vulnerable to sub-prime related issues. So everything was set and now let’s find out what triggered the crisis.
Sub-prime crisis
Quite obviously the sub-prime crisis occurred when the sub-prime borrowers defaulted in their mortgage loans, which affected the returns of CDOs. The main reason was the inability of sub-prime borrowers to pay back the money. Another catalyst was the rising segment of credits like Home Equity Loans through which the borrowers could take a second credit on the same mortgage. These added to their inability to payback the money. As a result, some defaulted. Some started force selling their houses due to which property prices came down, which made it more difficult for other sub-prime borrowers to refinance their mortgages into loans with lower rates. The result, more and more defaults!
Now at the securities side, the highly leveraged hedge funds, found themselves in distress due to the rising defaults by sub-prime borrowers. Investors who had put their money in these funds wanted their money back which forced these funds to liquidate their assets. And thus started a vicious spiral of forced selling of sub-prime securities! This reduced the price of these securities in the market and thus the crisis grew new bounds. Since hedge funds are highly leveraged, a small decrease in their asset values is enough to make them bankrupt. As a result several funds filed for bankruptcy. Thus the sub-prime crisis showed its red face!
Effect on global and Indian economies
Few companies in the US filed for bankruptcy which led to the loss of thousands of jobs. People who invested through hedge funds lost their money. UK and Japanese economies were affected a lot as there were a lot of money from investors belonging to these geographies that had been put into sub-prime securities through the hedge funds.
In other economies, hedge funds faced selling pressure to meet margin calls which led to the fall of various non-US stock indices, Sensex, Nifty being few of them!
Though not severe, Indian economy got affected by this in the following ways. A reduction in the investments in Indian securities/major selling of Indian stocks by foreign investors (foreign funds having CDOs created out of sub-prime loans and had selling pressure) and a subsequent melt down of Indian stock markets, IT companies losing few of their clients belonging to US mortgage industry & Hedge Funds due to cost cutting or bankruptcy are some of these.
Analysts say that the US sub-prime crisis is not over yet. Let’s see what more this disaster has in its store in the days to come. In the hindsight, one might think, had the banks been not greedy enough to put their money in riskier sub-prime borrowers and made securities out of it!
Related Articles
- Lessons from the sub-prime crisis
Sub-prime borrower
In US almost everything, right from getting a credit card to receiving various banking services, is dependent on the credit history of a person. A good credit history can be directly attributed to making payments on time, less revolving credit on credit cards, fewer payment defaults and check bounces etc. and is denoted by the FICO score or credit score of a person set by few credit rating agencies. It is easy for a person with a good credit history to get loans and other services while it’s exceedingly difficult for a person with a not so good credit history or low FICO score to avail banks’ services, let alone loans. Such poor credit history borrowers are called sub-prime borrowers. Since there is a risk of default on loans to sub-prime borrowers, US banks usually charge a higher rate of interest to them for the risk they are taking. From the bank’s side, a higher interest means a higher return, well with a risk. As a result, some banks had seen lending money to sub-prime borrowers as an opportunity.
Sub-prime boom
For a crisis to happen, first there has to be a boom. There were a few things that led to the sub-prime boom. I better quote Christian Stracke of Financial Times who had explained the situation quite nicely. “It all originated with a global imbalance between the supply of credit and the demand for credit. Global Central Bank let monetary policy move to a nearly unprecedented accommodative stance, pumping money into the system. At the same time, corporate, the traditional mainstays in terms of borrowing funds to invest moved to a defensive stance, having grown much more conservative in the wake of the Enron and WorldCom fiascos. Finally, the major developed countries began to gain a measure of fiscal discipline, with budget deficits shrinking, which further reduced the demand for credit on a global basis. That imbalance between investors flush with cash and the traditional borrowers not really needing or wanting that cash meant that investors had to look for new markets to invest in. As the Asset Backed Securities (ABS) market had been taking off and coming into the mainstream, a natural target was the sub-prime borrower - borrowers who in the past had wanted to borrow but who had been locked out of credit markets. Eager lenders met eager borrowers, with the mortgage originators, ABS underwriters, and credit ratings agencies playing the role of matchmaker, and the sub-prime boom was born.” Now, let's see what the banks or mortgage originators did to target the sub-prime borrowers’ market.
Role of Banks and Hedge Funds
So there was an opportunity among sub-prime borrowers and there has to be someone who could take the money from investors and give it to the borrowers. Who could do this better than the banks? Banks gave money to sub-prime borrowers and then they bundle the loans to a package and sold securities whose value was linked to the performance of the package of mortgage loans. Investors bought these securities and thus indirectly provided the money required for sub-prime lending. These derivative instruments are called Collateralized Debt Obligations (CDOs), which is one form of Asset Backed Securities. Thus, banks did away with the role of playing a financial intermediary. The total volume of CDOs in the US market is around $900 billion and only 17% of the CDOs were created out of sub-prime mortgages. Hedge Funds hold majority of these sub-prime related securities due to the inherent nature of their business making them extremely vulnerable to sub-prime related issues. So everything was set and now let’s find out what triggered the crisis.
Sub-prime crisis
Quite obviously the sub-prime crisis occurred when the sub-prime borrowers defaulted in their mortgage loans, which affected the returns of CDOs. The main reason was the inability of sub-prime borrowers to pay back the money. Another catalyst was the rising segment of credits like Home Equity Loans through which the borrowers could take a second credit on the same mortgage. These added to their inability to payback the money. As a result, some defaulted. Some started force selling their houses due to which property prices came down, which made it more difficult for other sub-prime borrowers to refinance their mortgages into loans with lower rates. The result, more and more defaults!
Now at the securities side, the highly leveraged hedge funds, found themselves in distress due to the rising defaults by sub-prime borrowers. Investors who had put their money in these funds wanted their money back which forced these funds to liquidate their assets. And thus started a vicious spiral of forced selling of sub-prime securities! This reduced the price of these securities in the market and thus the crisis grew new bounds. Since hedge funds are highly leveraged, a small decrease in their asset values is enough to make them bankrupt. As a result several funds filed for bankruptcy. Thus the sub-prime crisis showed its red face!
Effect on global and Indian economies
Few companies in the US filed for bankruptcy which led to the loss of thousands of jobs. People who invested through hedge funds lost their money. UK and Japanese economies were affected a lot as there were a lot of money from investors belonging to these geographies that had been put into sub-prime securities through the hedge funds.
In other economies, hedge funds faced selling pressure to meet margin calls which led to the fall of various non-US stock indices, Sensex, Nifty being few of them!
Though not severe, Indian economy got affected by this in the following ways. A reduction in the investments in Indian securities/major selling of Indian stocks by foreign investors (foreign funds having CDOs created out of sub-prime loans and had selling pressure) and a subsequent melt down of Indian stock markets, IT companies losing few of their clients belonging to US mortgage industry & Hedge Funds due to cost cutting or bankruptcy are some of these.
Analysts say that the US sub-prime crisis is not over yet. Let’s see what more this disaster has in its store in the days to come. In the hindsight, one might think, had the banks been not greedy enough to put their money in riskier sub-prime borrowers and made securities out of it!
Related Articles
- Lessons from the sub-prime crisis
Wednesday, 29 August 2007
Reverse Mortgage; a boon to the old
This year's Union Budget recommended to implement Reverse Mortgage in India. Reverse mortgage makes it possible for a senior citizen to lend his house to a bank for which he will get monthly payments from the bank till he dies. He can live in the house till his death and on the event of his death the bank will get the ownership of the house. In a way Reverse Mortgage is the selling of a house to a financial institution for which the financial institution will pay the estimated value of the house in monthly installments. Thus it could be considered converse of a housing loan, hence the name Reverse Mortgage.
The monthly payments are based on the estimated value of the house (considering the age, locality etc. of the house) and the expected age of death of the person. For old people who own a house and don’t have anyone to take care of them or don’t have sufficient income of their own for their living, this is indeed a boon.
On the other side, banks will get to sell the house after the person’s death by which they will get their money back. Thus it’s a very good opportunity for them too. And we can already see banks running for the pie.
Few days back, I saw a cartoon in Mathrubhumi, the Malayalam daily, on which the daughter-in-law and grandchildren of an old couple is taking good care of them for fear that the old couple might reverse mortgage their house and hence there is a chance that the daughter-in-law would lose the house! Guess this would decrease the number of old-age homes in India. And the saas-bahu serials in TV channels would also come to an end soon.
The monthly payments are based on the estimated value of the house (considering the age, locality etc. of the house) and the expected age of death of the person. For old people who own a house and don’t have anyone to take care of them or don’t have sufficient income of their own for their living, this is indeed a boon.
On the other side, banks will get to sell the house after the person’s death by which they will get their money back. Thus it’s a very good opportunity for them too. And we can already see banks running for the pie.
Few days back, I saw a cartoon in Mathrubhumi, the Malayalam daily, on which the daughter-in-law and grandchildren of an old couple is taking good care of them for fear that the old couple might reverse mortgage their house and hence there is a chance that the daughter-in-law would lose the house! Guess this would decrease the number of old-age homes in India. And the saas-bahu serials in TV channels would also come to an end soon.
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