Financial markets are in the grip of a crisis on the American mortgage market. The subsequent
loss of mutual trust between banks has virtually brought the loan market to a standstill. At such a
time, Rabobank's triple A rating shows its real worth.
Doubt as to creditworthiness
24 issue is THE WORD
Subprime mortgages
How a system ic
risk got out of
hand
TEXT Pierre Spaninks ILLUSTRATION Getty Images
Losses on American mortgages provided to the less creditwor-
thy among American house purchasers may rise to between
300 and 400 billion dollars. At least this is what some German
analysts expect. President Nout Welling of De Nederlandse Bank
currently feels that 100 to 200 billion is nearer the mark. And it is
precisely that uncertainty as to the size of the loss that has led to
bank share price declines, not only in the USA but also in the rest
of the world. Investors are concerned that even more bad loans
could have been issued in other sectors. As a consequence of this
suspicion, the loan market is virtually at a standstill, in spite of the
generous support measures provided by the American system
and the possible creation of an emergency fund.
How could this credit crisis have come about? According to
Maarten Rosenberg, Global Head Risk Management at Rabobank
International, it all began this last summer, when the realisation
hit home that many American homeowners would not be able
to repay their mortgage obligations in the proper manner. After
a number of interest rate rises in the spring, the number of bad
payers exploded, followed closely by the number of property
foreclosures. 'That created doubts regarding debtors' ability to
repay and then creditors' ability to lend".
A complicating factor was the plethora ofopaque investment
products previously created by specialists that bundled together
and sold on entire baskets of mortgage contracts. These invest
ment vehicles pulled in 'short-term' money subsequently to lend
this 'long-term' money. These products were popular with inves
tors as they offered a relatively low risk profile and a better return
than government bonds and bank deposits. Over the course of
time, an active trade in them grew up.
So far so good. The problem in the American situation was that
there were great differences in the quality of the mortgages.
"Dutch mortgage providers do not only verify the value of the
property but also the income stream and disposable income of
the owner", explains Rosenberg. "In the USA that's all a little fluff-
ier. There are firstly 'prime mortgages' that are solid, backed by a
good property and a healthy income stream with its associated
repayment capability. Then you have the 'subprime mortgages'
in which the verifïcation process looked mostly at the value of
the property. The investor ran a higher risk but it also produced
higher returns".