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".

Rabobank Bronnenarchief

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