Jack Broad asked:


Here’s a simple idea: When you invest you should probably actually LOOK at what you’re investing in.

Strangely, some of the most sophisticated investors in the world have been violating this simple idea. Last month at the 2008 ASF conference in Las Vegas, I asked one of the Collateralized Debt Obligation (”CDO”) investors who was on a discussion panel if he had any plans to change how he would go about analyzing the collateral underlying CDO’s in the future. In front of maybe 500 people, his answer was a surprising and somewhat defensive, “We have our procedures in place for selecting managers and those won’t change.” Umm. so hang on a second here. My jaw almost hit the floor. Let me get this straight. The CDO market itself is melting down right in front of our eyes and may even (especially in the area of “ABS CDO’s) vanish and go the way of the dinosaur. The contagion effect from sub-prime has infected all other areas of the CDO market including those CDOs that have experienced no defaults whatsoever in their underlying collateral such as “Collateralized Loan Obligations” (also known as “CLO’s”) and this guy is telling me he isn’t going to change the way he operates. I’d bet that this guy is gonna vanish along with all of the CDO’s out there that are imploding right now.

Well I’ll be!! I didn’t know what I expected to hear but “do nothing” was the last thing I expected to hear.

So let’s see what I mean by “looking” at what you’re investing in:

For ABS bond investors, this would mean being able to look through to the underlying loans and see what this stuff is that is behind the ABS bond payments. See all the characteristics of all of those loans such as mortgage type, FICO scores, original appraisal values, interest rates on the mortgages, geographic distribution, who originated the loans, who is servicing the loans – in short, all of the standard attributes. A lot of this information can be found in the original prospectus for the bonds. It also means realizing that very quickly the “origination” data becomes stale quite fast. In particular, the FICO scores and the original property appraisal values get stale. Because the data vendors that are out there such as Loan performance and Intex do not give you updated property values what should you do when a deal has 2005 loan originations and here it is 2008? Here are a few things:

1. Get “Home Price Index” data from various places such as OFHEO’s web site (free); Case Shiller (S&P bought them and has freebie data for some areas of the states); purchase a subscription to the non-freebie Case Shiller indices or go out to one of the other vendors such as Loan Performance’s new Home Price Indices which are supposed to be quite good or Radar Logic’s indexes etc. In short, you’re trying to find something that will tell you how homes, in general, have been performing in the area that the loans backing your particular ABS are in? That way you can possibly work out:

a. what is the current estimate of home value right now.

b. use some basic projection formulas to work out what values could be into the future.

These things are being doing by quite a few people, but not enough people do it because they don’t have access to a full database of expensive Loan Performance or Intex data and so they are, to that degree, flying blind and depend on others for their research and analysis and “transparency” into the deals themselves.

2. Another thing to do is to retrieve ALL loans from that Zip code across ALL securitized deals – not just the single ABS bond you’re analyzing – and look at the # of loans and the payment status of each of those loans (Current, 30 days delinq, 60 days delinq, 90+ days delinq, Foreclosure or REO) to try to gauge how affected is that particular zip code by the sub-prime mortage market crash. Also, you could use some mapping services to find out exactly where that Zip is. Is it in a highly populated area etc? Keep in mind that the services provided by Loan Performance give you only the securitized loan database. Many investment firms also have a whole other “inventory” of loans that were never securitized and these loans will not be getting reported on by Loan Performance or Intex. But it’s definitely better than nothing and should serve to give you a better idea of what’s out there in your loan’s particular zip code and the surrounding areas.

3. Items #1 and #2 above can only really give you an estimate of the value of the homes because none of those data vendors give you data that has a “finer granularity” than the zip code of the individual loans. This means that you do NOT have a property address. Sounds somewhat reasonable because giving the property address probably violates some sort of privacy information laws. Ok, fair enough. So what if you really want to nail it down closer then the guestimate in steps 1 and 2. Is there any way around this without violating any laws? Well, there are now data vendors appearing on the scene who will sell you a “county records” database. It’s expensive as hell. A cool annual subscription from one vendor of 1 million USD and from another 1.2 to 1.5 million. This database gives you detailed information about loans in a particular area and is publicly available information about who owns a particular property. Right down to the street address, when the loan was originated and the size of the loan etc. Wow! Not bad. If you’ve got a million bucks to spend (and some hedge funds are doing just that from what I’ve heard) you can really get down and LOOK at these loans. One problem is how to “marry up” the property data with the loan-level data provided by Loan Performance and Intex. One way that has been suggested is to simply run a process across all of the loans in your database looking for Zip, Origination Date and Origination Dollar Amount and look for exact matches within the same zip code of the County Records database. If you find only one record that matches your loan from that Zip code, chances are really quite high that you’ve found the exact right property. Now you can drill into the street address and actually see your property using Google Earth (watch out for stale data) or other services and try to get a real sense of what the value of the property is. You also now know who owns the property and maybe you’ve crossed the line so watch out here. Would this be a violation of privacy laws. Maybe some lawyer can tell me. Someone would have paid a lot of money for Loan Performance and a lot of money for the county records database but if these expenses translate into valuable investing insight, it’s probably worth it.

Okay, let’s go further into looking at our loans.

4. We should map all of the above loans onto mapping software so that you can see where your geographical concentrations are. The sets of loans would include:

a. The loans in the particular ABS deal you’re looking at investing in

b. The loans across all securitized deals for the particular areas that are in the specific SPV you’re looking at.

c. If you now have the property addresses you can look much more closely at the property

(I didn’t say it wouldn’t take some time to actually LOOK at the data. But isn’t that what good investors do? They perform “due diligence” on their investments before taking the plunge.)

5. Another approach to take is to always run your loans through standard “econometric models”. There are various vendors out there who have these models. You feed it the data about the loan and it comes back and gives you an “estimated loss” figure amongst other figures. Loan Performance has their own “analytical” model. Sum up all the estimated losses on your loans and you have some idea of a projected loss amount for your loans.

6. So let’s step up into the next layer of atmosphere in the Structured Products arena. Let’s say you’re a CDO bond trader and you’re supposed to be looking at investing in a CDO bond. You should be able to do one or more of all of the above items for every single ABS bond that backs the particular CDO Bond you’re looking at investing in. When I talked to one CDO trader he said: “we didn’t do any of that stuff. these things were just more bonds to be traded.” Yikes! I think you could say this violates the idea of “looking” at ones investments.

7. Now let’s get really extreme. For CDO’s, that invested heavily in ABS bonds (which in turn had sub-prime mortgages in them), you should be able to run cash flows on every single ABS bond underlying that specific CDO given appropriate prepayment speeds, interest rate curves, default rates and loss severities. You should be able to stress each of those factors to get some kind of idea of how sensitive the prices of EACH of the ABS bonds are to various scenarios. Additionally, if the CDO has some investments in OTHER CDO bonds as part of its collateral, then you should probably look hrough to each of those CDO’s and see what sort of collateral underlies those bonds because if the losses on those underlying assets reach a certain level, it will most certainly result in writedowns (losses) on the CDO bonds themselves.

8. Now, obviously CDO’s became a highly complicated and “layered” bit of stuff. Layers on top of layers on top of layers – but what was forgotten was if the underlying foundation were to erode, ie. the individual underlying mortgage loans themselves, the entire edifice would collapse. Hmmmm. Doesn’t that basically just about sum up where we are at the current moment?

The bottom line really reduces down to these simple ideas:

A. THE INDIVIDUAL COUNTS. As goes the individual, so goes the ENTIRE economy.

B. You have to actually LOOK at what you’re investing in.



WADE

Ricky Lim asked:


Most people find themselves strapped for cash at times and are held back by the lack of money. Maybe you don’t have money to buy a car or fulfill some other wish, or maybe it’s more of a personal matter. If you’ve never been in such a situation until now, then consider yourself happy.

Those of us that have been in situations such as this, will need from time to time a secured bank loan to help us through difficult times. What unsecured loans lack while secured bank loans have, is that you can use a collateral and get better deals because of it. Below are a couple of ways that a secured bank loan can help you:

Reduce Your Debt

You might think that taking loans to reduce your other loans sounds bad, but the truth is that secured bank loans can help you quite a bit to reduce your debt. You can use secured bank loans to cover five credit cards for example, instead of keeping track of each of them and repaying them individually.

The end result is that you will pay only one bill monthly, and the secured loan insures that you pay less. The lower interest rate insures that.

Remodel Your Home

Do you need to invest in a new roof for your house? Or you want to put a swimming pool behind the house. It doesn’t matter if you need it for your house or you just want to make it more comfortable, with the help of a secured bank loan you can do it.

A secured bank loan is also a home equity loan, which is determined by considering the house’s value and the mortage that was already paid off. There is another advantage here, the fact that by improving your house, you’re increasing its value, so you can also consider it an investment.

Take A Trip

You can also take a secured bank loan to have some fun and travel. Instead of saving for years for your dream vacation, you can take a secure bank loan to go to your Disneyland trip, seeing the pyramids from Egipt or any other dream you might have when it comes to travel.

If you’re comfortable with some debt, you can take that dream vacation without running into as much debt as if you used credit cards. Of course, the best solution would be to save that money instead of getting into debt, but if you need a loan, then a secured bank loan will work best.



JEREMY

Rupert Drake asked:


Before we begin this guide you have to understand what IS an endowment policy , Mainly it’s a mix of life insurance inlcuding investment growth saving plans , It’s a premium based package that has a certain expiry period , This premium paid into the endowment is invested in the stock market by the policy office , And as the endowment policy matures , Its holder is paid the agreed upon amount along with bonueses , If the holder dies in its mid-term then the insurance is paid to his beneficiaries .

Endowment policies can also be used to repay mortgages , While the endowment mortgage is a different story as the premium paid on a monthly basis includes the interest on the loan .

Steps you need to take :

Evaluation of your Financial needs :

You have to assess all of your financial needs and it would be even more favourable if you were to consult a pro before you start buying endowment policy , As there is a plethora of of types , For example :

Low cost endowment,Traditional with profits endowment,Traded endowment, Unit linked endowment policy..etc

And of course each and everyone of them has pros and cons of their own , That reinforces that fact that you should find out your financial needs and capabilities and invest in the right type that suits you completeley .

Choosing an Insurance Company with a Great Reputation :

This is very important , You have to choose a top endowment company for buying endowment policy before you start dealing with them or giving them your trust , Find out the company’s market standing and verify every single fact yourself , This way you know for sure whom you’re giving your hard-earned money to .

Front-end Loading evaluation:

Which are the main setup costs including adminstration charges and comissions , They’re usually high in the early years , And thats why you have to find out the past performance of the fund and its charges before you start buying endowment policies .

Checking Endowment Mortgage Fee: If you’re going for endowment mortagage , You have to evaluate the mortage through calculating its fees thoroughly before buying endowment policies,Occasionally the lender can charge more fees for the front loan or processing , So make sure you plan your investment wisely instead of going autopilot .

Options for Endowment Surrendering or Selling :

Instead of surrendering your endowment policy you can just sell it in the TEP market and make a great value out of it , And it’s much better than endowment surrender because it has a better value for both you and the insurance company .

5 Great Tips for buying endowment policies :

*Consult a professional financially as such investment can affect your finance for a long time .

*Study carefully all the details about the insurance company and only start buying when you’re 100 % sure .

*Before signing any agreement or contract make sure you understand every bit of detail.

*Choose the best policy that suits your financial needs , So you can gain the best value & advantages .

*Make sure checking the flexibility plan and every alternative option for protecting yourself if any unwanted change occurs in your finances .



SANTIAGO

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GONZALO