RISK AND/OR REWARD?

Nearly all of us are familiar with the concept of risk and reward. Rational investors demand a higher potential return for a riskier investment. For example, US government bonds are considered risk-free investments. They are backed by the "Full Faith and Credit" of the US government. The interest rate paid on US Treasuty Bills is generally considered the "risk-free" rate of return.Right now that rate is a little over 4%.

But investors that invest in a new strip mall, high risk tech venture, or Canadian mining stock trading on the Vancouver Stock Exchange will demand (but not neccessarily get) a higher return.

BAD CREDIT. NO CREDIT. HIGHER INTEREST RATES.

The same rules work in the credit market. If you have good credit, you can borrow money at lower interest rates. Bad credit. Be prepared to pay more.

But what about a subprime meltdown?

Mortgage lenders, especially subprime lenders, are faced with high rates of default and foreclosure. What do they do? They can play hardball with distressed borrowers, foreclose on mortgaages and effectively become real estate owners, managers and agents. Houses that are forelcosed may sell for only 50-60% of the mortgage debt. Less, sometimes, in distressed markets.

Or do mortgage lenders look more at the absolute reward side of the equation? Will they be willing to write down debt and/or lower interest rates to allow borrowers to remain in their homes and avoid foreclosure?

The Author does not have much information on the current state of loan renegotiations, but knows that a modestly discounted debt beats a dead house awaiting a sheriff's sale.

JUST A QUESTION FOR TODAY IN THE DESERT OF THE REAL!