Mortgage Market – Why are Investors Anxious?

Aug 11th, 2007 @ 7:08 AM by Alden Smith

The market, shaky at best, closed up for the week, with the Dow Jones closing down 31.14, but up 0.4% for the week. The S&P 500 and NASDAQ also closed up for the week. Investors, anxious because of the mortgage market, are making the market volatile by the signs of trouble that are tied to the debt market. Volatility, measured by a popular index of options trading, is at its highest level in 4 years. Little comfort is being taken in the fact that volatility is lower than it was earlier this decade and in the late 1990′s.

Part of the current panic lies in the fact that the market is so spread out over individual investors that no one is capable of knowing who is taking the most risk. Risky loans – such as the sub-primes, have been repackaged by many institutions and sold to investors world wide, thus diluting the risk. No longer do banks produce these packages, but instead they go directly to the financial market. Doing so erases the protection of regulatory institutions, which aided the banks, and not investors. Without this regulatory protection, panic becomes widespread because investors are more exposed to risk.

Investors are typically shy when it comes to investments. They want to protect their funds, and quickly pull out their money at any sign of trouble. Without the protection of the Federal Deposit Insurance Corp (FDIC), investors are bailing out like rats deserting a sinking ship.

Some relief is in sight. The Federal Reserve has put another $38 billion into the market on top of the $24 billion it put in on Thursday. A lot of steps are being taken by banks both in the US, and world wide to prevent panic.

To put things into perspective, Moody’s website, Economy.com, reports that the current value of the troubled loans is an estimated $2.5 trillion. Compare this to the $175 trillion in equity value and bank and bond debt outstanding worldwide. It figures out to be about 2% of the world market, which should not be anywhere near enough to rattle world markets.

I believe that this situation will right itself. A lot of people are dependent on investments for financial security, but the fact remains that the current housing situation must stabilize. It is, after all, one of man’s basic needs.