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Subject:  Re: Euro savings? Date:  12/13/2004  2:40 PM
Author:  activeREinvestor Number:  11433 of 36786

Define serious?

Take a 30%+ drop in the underlying collateral

30% is extreme. I think most people recognize that it is rare for such a correction in the residential sector. I am only talking about 1-4 unit residential properties for discounted notes.

Most lenders who provide mortgages base their models on a much more 'aggressive' view. Otherwise 20% would not be the point at which PMI is considered unnecessary for a lender to write the loan. They depend on other factors such as the borrower, etc but we are only talking about the value of the collateral here. Discounted notes come with a payment history.

For the point I was making about earning higher returns I will not consider deals that go above 65% LTV (some being closer to 50% LTV). Hence, if we have a 'serious' correction I would either be still protected or close to it. I should make more money from a default then is the person pays on time in almost all situations.

Others can make the case that if we get a 30+% correction in the US residential housing marketplace stocks and other investment will find the waters very choppy.

If people need to sell assets (stocks, bonds, MF, cars, CDs) or lose their house...
If housing fell that much then interest rates likely shifted up a fair amount...;
If there was mass unemployment to trigger such a correct we have bigger issues...

I agree there are risks. I am not sure that risks with this type of investment are actually greater then the risks for other sectors. Remember, for finance offered the general public, RE loans are generally the cheapest which is the banking system and the bond holders all saying that the default risks are minor compared to alternatives. Not zero. Just low compared to the alternatives. Otherwise the financing would cost more when you apply for a loan.

Yes, some advantages from the pooling of the mortgages to offset the risks of any one loan being in default.

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