Friends, Fans and Doubters,
Stop press....stop trading...stop real estating....catch up with the sub prime crisis that is sweeping america for past 2 weeks (1 month ago the signs came)....think.....do tough due diligence...

Q: what is subprime crisis
A: from 2002 to 2006, banks, mortgage lenders, etc gave massive loans (trillions of dollars - countrywide alone might have given 400 to 600 billion dollar every year, as they are the biggest mortgage guys in america). Of these 10 to 20% are subprime (although news says 5% to 10%). subprime is the category in which loans are giving to poor credit people. actually the term subprime is a fancy term from wall street millionarie executives. the correct word should have been junk mortgage, because it was given to people with junk credit history.

Q: what are the other loans
A. Alt-A - this falls between subprime and prime. NINJA (No Income No Jobs no questsions Asked) loans and finally prime loans (loans to good credit people with stated income)

Q: why should we worry. since it is 'only 10%' that is affected.
A: 10% is a huge number running into trillions of dollars. Countrywide alone is on the hook for several tens of billons of dollars. Goldman sachs is taking a big hit. Bear stearns might not even survive. Around 20 hedge funds have closed shop. Several banks have exposure on customer side as well as on wall street side. Also take into account NINJA loans, this can go upto 20% pretty easily. 20% of bad loans is a big number.

Q: Okay. 20% is a big number, but rest 80% is doing good right..so why fear?
A: Nope. For instance most of this 80% got ARM's and other teaser loans at a very easy rate. My friend got at 3.5. My BIL got for 4.0, several of my friends got for 4 to 4.5 anywhere for ARM 3/1 5/1 which means most of these crazy loans are resetting to current rate (6.5 to 6.75 for conforming loans - less than 417K; 7 to 8% for non confirming loans - > 417K) in 2007 and 2008 and out of these 80% significant amount cannot pay monthly mortgage at 6 to 8%.

Q: So what, our bearded guru Ben Bernanke, will reduce the interest rate by a % point this year and another cut in a couple of months will ease pain.
A: Even if this happens, that does not mean banks will be giving at the reduced rate considering their present experience. Also in majority of america, homes have fallen upto 10 to 20% in price with another 10 to 20% upcoming decrease. no bank will refinance homes that have lost value (say 25% for instance) at current rates. as they increase rates, more default will happen simply because banks will not take more debt by giving cheaper rates for price decreased homes.

Q: So what, I am a bull, which will throw away recession
A: It will be a miracle if countrywide survives. Even if it does, it will be 15K people down from 65K people. Goldman sachs will be cutting 30% just like that, with 50% an easy target. If bear stearns survives it will be a huge miracle. Countless hedge funds, mutual funds that have mortgage exposure will lay off people. This can easily spread onto home builders (who are already are in a bad shape and also there are skeletons in their closet also), capital goods, travel, tech, etc.

Q: So what. Americans still be driving the economy to bull region.
A: Not so easily. With 2 million upto 7 million (upto even 10 million) households will come under direct or semi direct mortgage attack brining in easily 10 to 30 million so far high spending individuals under pressure dragging the rest of population with them in terms of reduced spending.

Q: So what man...only america is getting affected. You have Japan, China, India all chugging along...
A: An Ah...not so easily again. Looks like Japanese banks have significant measure of investment in mortgage bonds, securities, investments in america and lot of them will vanish. As america slows, the excessive chinese production (a majority of whom goes to consumeristic america) will have to stop thereby slowing down. India's tech driven IT/BPO economy will come direct pressure as american companies cut down upto 30% of spending just like that since they have to cope with slowed demand from americans...The chain reaction will be america-->Japan-->China-->India very easily.

Q: I dont care at all. My company is not affected by this crisis.
A: An...Ah not so.. If you are in banking, insurance, mortgage components you will take a direct hit. My judgements is the companies will be making a blind 30% cut in budgets. If you are in tech sector this slowness might catch you also...Watch for your directors/VP's statements closely.

Some do's and dont's:
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1. STOP buying apartments priced heavily 3000/3500 and above in distant currently no man places (like navalur, GST, outskirts of OMR, mahabalipuram, etc) right away. Even without this crisis buying a 65L apartment in navalur, gents, is insane (apologies for the use of the strong words).

2. If you want to buy apartment/homes inside present residential areas, then reduce your bidding price just like that by 30%. For instance you are looking for a ground in an area is priced 3500 psqft. Tell that you can give only 2500 or so. Be ready to walk out. Give your mobile and tell it is a buyers market and ask them to contact you in case the seller wants to close the deal.

3. CASH is the new king. Dont think CASH is waste. If you have cash, value it and use it diligently.

4. Dont buy land at distant areas (sriperumbudur for instance or outskirts of ambattur, or poonamalle) at sellers rate. Ask for 30% of the rate. Give your mobile and tell it is a buyers market and ask them to contact you in case the seller wants to close the deal.

5. If buying land in 'new chennai' !!! areas like walajabad, tiruneermalai, guduvancheri, end GST roads, ask for 50% reduced price. Be ready to walk out in case the seller does not budge. New chennai is after all a term like sub prime

6. If buying in tier 2 cities (kovai, trichy, etc), try to buy in bulk (like half a acre or more) and bargain very heavily for prices. Same 30% reduced argument holds good.

Friends, the blood bath in american economy is just starting. In 98 crisis, the source was south east asia. Our good old alan greenspan was easily able to quell it by bailing out few hedge funds, investors who invested in south east asia. In 2001 dot com crisis, only dot com companies which had paper money got smashed and our greenspan slashed interest rates and was easily able to kickstart the economy.

But this crisis looks like blood crisis. Real homes, real people, real money, real estate. Fake mortgage brokers, fake loan officers, money minting bogus executives, globe trotting careless CEO's of big mortgage companies, banks, rating agencies in cahoots with hedge funds and banks and hence failing the crucial regulatory and oversight angle, etc - all of whom are responsible.

Watch out guys.....dont think the bubble will pop...looks like it will EXPLODE...

Some opinons are
http://www.thehindubusinessline.com/...2051600400.htm
http://www.thehindubusinessline.com/...2050470900.htm
http://www.nytimes.com/2007/08/19/bu...in&oref=slogin
http://www.nytimes.com/imagepages/20...T_GRAPHIC.html

Hi Shanbhog,
Links don't work.

So the bubble is set to explode? Maybe another big bang and a whole new universe is born!

We are creative.