The Finance Professor

Five Lessons From the Mortgage Meltdown

09/27/07 - 12:25 PM EDT


The economy has experienced a mortgage mortgage and credit credit market "dislocation" of historic proportion this year.

However, academics use terms like dislocation rather than trader talk like "crash," "bubble bursting" or "meltdown." But regardless of how it's labeled, there are a few timeless lessons. However, let's start by doing a brief review of what led up to the recent "debacle."

Late 1990s to Early 2000s

  • Thanks to the effects of high interest rates, the failure of the savings and loans industry, and excessive speculation of the late-1980s, the real estate real-propertymarket languished for many years. As an asset class asset-class, real estate took a back seat to the global thirst for technology and Internet stocks.
  • A collapse of the technology and Internet bubble led the nation into recession recession, so the Federal Market Open Committee -- FOMC federal-open-market-committee-fomc -- lowered interest rates. Then soon after the attacks of Sept. 11, 2001, the FOMC lowered rates even more.
  • Demand for home ownership soared as employment rose and interest rates declined.
  • New and innovative mortgage products were developed and marketed in parallel with asset-backed securitizations asset-backed-bond.
  • Mortgage originators and REITs stepped into the void left behind by the S&Ls, keeping the S&Ls' trademark poor risk management and outside of the realm of major regulation.

Mid- to Late 2000s

  • Excessive speculation and overbuilding took the housing markets to new highs.
  • Underwriting underwriting standards by mortgage originators were lowered to accommodate more borrowers who fell into the "subprime" category.
  • Interest rates rose as the FOMC removed the "policy accommodation," as it began to tighten interest rates by a quarter of a percent on 17 occasions, up to 5.25%.
  • Mortgage defaults default rose, liquidity liquidity for securitization securitization disappeared, mortgage companies failed and home builders were stuck with too much inventory.

So what can investors learn from this history? Here are five key takeaways to benefit investors in the future -- regardless of asset class.

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Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.


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