It's been a whole month since my last blog entry on mortgage investing. The reasons for this are many but the biggest reason is that the fall is traditionally one of my biggest seasons of the year for private mortgage investments. As a result I find myself extremely busy dealing with new investments in mortgages and MICs by investors, and have found it difficult to find the time to contribute to this column.
In addition, of course, I also had to serve Jury duty in a trial in BC Supreme Court, which was interesting, if you consider "interesting" to be a pejorative. Twelve ordinary people come together to decide the fate of one of our fellow citizens, whether or not he is guilty of the crime of which he is accused. Human nature being what it is, I was amazed that we all managed to agree on a verdict, despite much discussion about the merits of the case during deliberations. I hate the jury system, but I still think it is better than allowing the experts to decide our fate as citizens.
Now, back to mortgage investing.
2009 will go down as the year of the great world-wide financial crisis, the likes of which few of us have experienced in our lives. According to all the economists there really has been nothing like it since the great depression.
This crisis was triggered by the US sub-prime mortgage collapse, and, quite frankly, incredibly incompetant lending practices south of the border. Unfortunately it didn't end there, as the underpinings of whole international financial system have ended up coming under assault as a direct result of a profound lack of trust in the system itself by the very people in the heart of the system.
When banks won't or can't lend money to other banks, financial liquidity dries up in a hurry. Much of the efforts of the various national governments and central banks around the world are doing everything they can to restore faith in the system, not so much in the minds of ordinary investors but rather in the hearts and minds of the major players in the industry.
There has been a lot made lately of the failure of the US regulatory agencies to control the conduct of US Banks, and there is probably a significant amount of truth to the criticism. However, the challenge is not merely about regulation and control, but rather more fundamentally - if nobody understands the investment products they are buying or selling, how can faith and trust ultimately be earned and maintained. A significant part of the failure of the international financial system has been the undermining of sophisticated financial products like derivatives.
This should not be taken to suggest that more sophisticated products shouldn't be bought or sold, but rather there needs to be more transparency and a better job done of disclosure of these complicated financial products. The banks who rely on these instruments to provide fundamental security for their loans need to be able to rely on the ratings assigned and on the disclosure filings as to the nature of the risks being undertaken when they invest in those instruments.
High risk investments are not necessarily bad investments, they are simply investments that require a risk premium appropriate to the amount of risk and type of risk. They should also represent only a portion of a balanced portfolio rather than a primary portion.
I've never criticised my relative who goes to the horse races ever Thursday and "invests" fifty bucks in his favorites of the day. Some days he wins, although mostly he doesn't. So this investment is extremely high risk, but once in a while he wins enough to make the whole exercise worth every dime. Those nights are great.... we all go out to dinner to celebrate his success as a gambler. However, if he started to gamble his nest egg, set aside for his retirement, I would be most concerned.
Of course, I found it equally perterbing when I realized that his investments in blue chip mutual funds were almost as risky as the race track.
Years ago I began to move out of stock market based investments into secured investments or real property. Yes, real property does go up and down. Just like stocks in the public markets. But there is a fundamental difference - real estate will always retain real value over the long run, as opposed to the stock of any given company, which has at least as good a likelihood of disappearing completely in 15 to 25 years as it does of thriving.
You want proof? Check out the names and positions of the top 1000 US listed companies in 1990 and see how many of them have completely disappeared in 2009. There are no properties that have fallen into the sea since 1990, and most have increased in value at a pace at least equal to the rate of inflation in the intervening period.
Real property and security based on real property, if managed with a degree of caution, will protect an investor for the long run. In the short run you can easily lose your shirt if you make a bad investment, or leverage your capital at the wrong time and in the wrong market. However, in the real estate world, time is generally your friend.
Just remember this - subprime mortgages in Canada have a default rate of less than one half of one percent. A portfolio made up of Canadian mortgages, even subprime mortgages, will have made money during the past twelve months during this market meltdown. There is few other investments that can make the same claim.
There are few guarantees in the world, especially in the investment world. But there are reasonable ways to mitigate risk, including lending in strong real estate markets in a stable country with good prospects.
And being persistent and patient enough to see the investment through.
Posts
Mortgage Professionals Canada Launches New Consumer Focused Advocacy
Campaign
-
It has been over six months since federal Finance Minister Bill Morneau
announced significant new rules for mortgage insurance and eligibility
requirements...
6 years ago
