Am I Really Worried About the Spanish Flu?
Recently, the Bank of Spain reported that it had foreclosed on almost 40,000 primary residence dwellings in 2013…….about 45,000 homes when you include vacation homes. If you are the average American, you think to yourself “oh that’s too bad” and go about your business, however, we can’t afford to think that way any more. I believe that it was Hillary Clinton in her book Hard Choices who made a comment, which really resonated with me. She said that we have to be just as aware of what is going on in Cairo, Egypt as we are of what is going on in Cairo, Illinois…….or if I take it a step further, we need to be just as concerned with Athens, Georgia as we are with Athens, Greece. As I consider it, this is so true. Our portfolios reflect it.
Because of diversification of all sorts, pension fund managers, mutual fund managers, insurance companies and investors have been chasing down higher returns wherever they can find them. They have invested in tech startups, LBOs, and precious metals. For so long, so many countries avoided the idea of real estate debt as an investable asset class. Accordingly, securitizing the debt and selling it to investors was equally absurd; particularly in countries in the East for which most purchases are made with 100% cash. Accordingly, with the advent of esoteric mortgage products that can be sliced and diced and sold in various pieces, at different interest rates that are commiserate with applicable risk, it is totally conceivable that anybody’s mortgage can end up just about anywhere….in the world.
I have international growth stocks and bonds as a part of my portfolio, and if you are a “moderate” to “aggressive” investor, your portfolio may have some of this asset class too. When you peek into the annual report or prospectus of your mutual funds, you may shocked to find out that you have a lot of debt from countries that haven’t been too stable as of late. Brazilian, Russian, Indian, and Chinese (BRIC) based bonds of all sorts have been stuffed into portfolios with the underlying owners not being preoccupied with it in the least bit, however, recent worldwide malaise has taken hold of the headlines and we all should consider “just where are my assets invested?” If it is Greece, Hungary, Ireland, Italy, or Spain, “caveat emptor” applies (let the buyer beware).
The Spanish Flu is real. Foreclosure in the land of the matador is very real. One can turn on the TV screen or flip through the paper and see hundreds of people being forced out of their homes by La Policia. In the same way that short sales, foreclosures, and “loan mods” turned the American…….no….I’m sorry, the world’s economic stability upside down, Spain, and so many other countries have the same potential effect, though for now at a smaller scale. Homeowners in Spain are committing suicide as they did here. The European Central Bank had to bailout the Spanish banking system just like they did here. It has also tightened lending standards, just like the Feds did here. However, Spanish lending rules aren’t necessarily the same as American rules. In Spain, the government can issue a moratorium on all mortgages across the nation (as they did in 2012). The thought of that in the US is unfathomable, as lenders make loans knowing that if a borrower defaults, due process will result in a returned asset that can later be sold to recoup dollars lent out. It’s easy to get up to speed on real estate laws that may vary from state to state; it’s a different ball game when the laws are written in another language. Hence, I think that we all should take a moment to see how heavily exposed we might be to real estate issues outside of the land of the free and the home of the brave. I know that a borderless investment world has changed the way that I think.
When I was growing up, the Spanish Flu was a part of history from 1900 to the modern era. It spoke of an unusually deadly pandemic that spread across the world with outbreaks that were so severe that they crippled parts of Germany, Britain, France, United States, and of course Spain, where King Alfonso XIII nearly died of the disease. It is said that the Spanish Flu infected over 500 million people across the world. The funny thing is, I would imagine that just might be the same number of people who have been in some way affected by the worldwide mortgage meltdown as well. Capital One’s now famous moniker is “what’s in your wallet.” I would venture to change it and ask, “what’s in your portfolio?” Atchew!!
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at email@example.com.