by Gaurav Bhola, MSM

The reverberations from the US subprime mortgage fiasco have not only been felt at home but abroad as well. European stock markets took a significant downturn when two weeks ago French bank BNP Paribas stopped panicky investors from cashing out from three investment funds worth $2 billion. The temporary suspension of the funds, which are heavily invested in subprime mortgage debt, reflected BNP’s concern of market illiquidity and difficulty in ascertaining the true value of the funds. Since the subprime mortgage crisis, markets have been unable to accurately assess the value of risky mortgage-backed securities; by some estimates currently these securities only reflect a third of their true value. However, across the Atlantic, many Europeans are unfamiliar with risky mortgages because traditional mortgage loans reign supreme.

Many European mortgage lenders require 20 percent down payment during home buying. The riskier home loans such as, adjustable rate mortgages or interest-only mortgages are still exotic. The traditionalists in Europe have been slow to integrate the US mortgage model due to the governance by consensus within the European Union framework.

The European Union, in formulating policies, must arrive at solutions palatable to various members and their constituencies. The role of government and business in society is antithetical to that of the US. Unlike in Europe, US markets and businesses are less regulated and formulating laws less tedious. In the US, mortgage lenders, mortgage brokers, and consumers took in many cases, unnecessary risk in the past real estate boom by getting such mortgages as, adjustable rate mortgages, home equity line of credits, mortgage refiancing, and home equity loans. For the time being, Europe has been able to weather the subprime crisis due to their conservative lending practices and consumer behavior.

Also, most European mortgage lenders do not repackage and resell their mortgage-backed securities. Alternatively, their “covered bonds”, which are similar to mortgage-backed securities, are unique in that issuing financial lenders must pay back investors even if homeowners default. Herein, the financial institutions that offer “covered bonds” have an inherent interest in giving home loans to borrowers with higher quality credit.

For many years, European mortgage lenders were ridiculed in the US as risk averse and lacking capitalist vigor. Ultimately, Europeans are having the last laugh over past derisions. The Dutch giant ING reported a 27% increase in second-quarter profits due limited exposure to the American and European subprime mortgages.

Similarly, in the US, New Jersey based Hudson City Bancorp (HCB) has been unaffected by the subprime mortgage home loan and foreclosure debacle, mainly due to its offering of only traditional mortgage loans to excellent creditworthy borrowers.

Unlike, other mortgage lenders like Countrywide Financial and American Home Mortgage tumbling stock, HCB’s has risen 21 percent since July. Like many US mortgage lenders Countrywide and American Home offered “exotic” mortgages to anyone and everyone. But Hudson, like the European mortgage lenders stuck to their traditional business practices and offered the “boring” mortgages such as the New Jersey mortgage loans mentioned above. Well, it paid off, look who is having the last laugh, sometimes old is gold.

Is Old Still Gold?

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