Ducking for Cover After the Subprime Implosion

Physician's Money Digest, May 2007, Volume 14, Issue 5

Wall Street Journal

The recent damage to the subprimemortgage market could trickle down andimpact your ability to borrow, an article inthe reports. A subprimemortgage is a mortgage granted toa person with a less-than-perfect creditreport; lenders charge a higher interestrate on these types of mortgages to compensatefor potential losses from customerswho may default.

Wall Street Journal

The dip in the recent subprime mortgagemarket, which represents only 15%of the total mortgage industry, has implicationsthat reach far across Wall Street.Over the past few years, many investors,including insurance companies and WallStreet brokers, have been willing to takeon the risk of subprime mortgages.However, recently a different type of buyerhas surfaced, collateral debt obligations(CDOs). CDOs are a structured financialproduct that at one level can be thought ofas a mutual fund, allowing investors topool their money to invest in subprime residential-backed securities, including thelower-rated portions of the subprime market.Because the delinquencies in subprimemortgages have now risen faster thanforecasted, investors may shy away fromthe CDOs. The speculatesthat if CDOs shrink in volume, theresult could be higher interest rates andless credit availability for borrowers.