The Subprime Lending Crisis In English

By now everyone who hasn't been living under a rock for the past 6 months has heard about the mortgage crisis. Basically what's going on is that during the housing boom, greedy mortgage lenders were financing huge mortgages to under qualified borrowers. Sub-prime borrowers include people with less than perfect credit and those with good credit but little or no documented proof of income. These borrowers have a higher default risk and therefore pay a higher interest rate in order to compensate for the risk they pose.

In addition to lending to sub-prime borrowers, there was a lot of adjustable rate mortgages being financed and people experience huge jumps in their monthly payments as interest rates rose so what may have originally been an manageable payment turned into something that people just could not afford to pay.

Worse yet was the creative financing. Loans that involved 0% down and interest only loans (where you pay only the interest and nothing towards the principal) made a huge contribution to the turmoil.

A lot of home buyers were expecting a huge appreciation in home values and thought that would cover them but the boom experienced for the past few years was nothing more than a bubble. Record low interest rates and the ease of getting a loan fueled this bubble. However, home values began to decline and a lot of people began to default and go into foreclosure because walking away from a loan they couldn't afford in the first place on a home declining in value was the easiest solution to the problem.

Well the greedy lenders were left holding the bag. It didn't just stop with the lenders though. Many mutual funds and securities purchased and invested in these sub-prime loans so they took huge hits as well.

The problem affects the entire market though for a variety of reasons. Whenever investors see any uncertainly and increased volatility in the market they tend to start selling off, driving down stock prices. They dump their holdings related to the issue and become more risk averse.

Unrelated stocks are affected because a lot of companies even large ones rely on debt to fund projects and operations. With the current mortgage crisis there are less funds available for borrowing and it is more expensive to borrow.

Most companies have some degree of debt. This is not necessarily bad debt because the companies finance projects and operations with the borrowed funds with the expectation that more money would be generated from the projects and operations than the debt costs them.

Anyone hoping buy a home with less than perfect credit and solid documentation can forget about it for now. However don't give up hope. Spend the next 6 months or so working on building up your credit score and fattening up your down payment. By the spring there should be some more balance and stability in both the stock and housing markets and you may be able to find some wonderful deals. Remember all these defaulted mortgages represent an available home that banks will be eager to get off their hands.

Yours Truly,
The Finance Girl

Protecting Your Portfolio With Defensive Stocks

If you still want to invest in the market during shaky times like now, defensive stocks are the way to go. Defensive stocks are those that are not dependent on the overall economic cycle. Though they are not the stocks of choice to have when the economy is booming, they do outperform cyclical stocks in hard times.

By now we're all well aware of the sub prime lending crisis that spread like a disease, attacking the stock market once and once the market began to recover, more bad news. Today it has gotten worse. Wal-Mart announced that their earnings will be less than expected due to consumers tightening up on their spending. Home Depot made a similar announcement but it is understandable if not expected due to the nature of their business and the current state of the housing market. However, like any consumer knows, you can only curb your spending to a certain degree, at the end of the day, we still need food, gas, electricity, clothing (especially when there are children in the household) and a roof over our head. This is where defensive stocks come into play.

Products such as tobacco, pharmaceuticals, alcohol and utilities are not dependent on the economic cycle. Additionally, food companies that make most of their income from grocery store sales, as well as alcohol and bottled beverages are additional safe options when trying to protect your portfolio from a beaten up market.

Why You Should Invest In Money Management Software

If you don't know where your money is going, its time to invest in a money management software program if you don't already have it on your computer. I've tried both Microsoft Money and Quicken and find both of them to be excellent for managing personal finance and taxes.

After about a month of tracking your finances you will have a rough idea of where you are spending and what areas you can make some budget cuts. However to get a really good assessment you will need about 3 months.

One great feature of money management software is that you get to see the big picture. The software generates reports and graphs that show where your money is going for both the month and the year to date. You can also see how much you spend in each category for these periods.

You can easily import credit card, bank and Sharebuilder statements to the program and manage them from there. The program will even download unbilled transactions.

In addition to being able to categorize your spending and track accounts, you can manage bills and due dates and the program offer due date reminders. Both Quicken and Money allow you to pay your bills online and schedule payments.

If you have investments, both software programs allow you to manage your portfolios. They also retrieve historical, value and fundamental data on your securities. Quicken also allows you to access accounts online and download recent activity at scheduled intervals. This is particularly useful in the Investing Center because it allows you to track your stocks daily performance, in percentages and dollar value gains and losses.

My favorite aspect of these programs are that they generate excellent charts and graphs that allow you to compare your spending, balances and investments both to each other and over time.

Money management software is essential to getting a hold on your finances and keeping track of your financial history.

Yours Truly,
The Finance Girl