It's No Surprise to Us
By Ric Edelman
September 19, 2008
I’ve been saying for years that consumers should make careful, informed decisions when choosing investments and mortgages. Here is a sampling of the advice — and warnings — we’ve issued in the past about money market funds, mortgages and mortgage-backed securities. It’s too bad that some people didn’t get (or heed) the message.
Warnings that Money Market Funds Might “Break the Buck”
|1999||The New Rules About Money – Rule #2 Never Pick the Money Market Fund Offering Higher Rates Than Everyone Else
“So if you invest in a money market fund, be careful about which fund you choose. Investing in the fund that brags it has the highest yield could be a big mistake. You’d be more prudent to choose a money fund that has a slightly lower return, such as one that invests only in U.S. Treasuries. If you handle your money fund that way, buck-breaking will never break your back.”
|October 2003||INSIDE PERSONAL FINANCE NEWSLETTER - Are Money Market Funds Safe? “We are beginning to see signs of change in the money market fund arena…there is a theoretical possibility that money market funds might ‘break the buck.’”
Anticipating the Mortgage Crisis
|1996||The Truth About Money - Chapter 56
“Ignore What the Real Estate Industry Says You Can Afford”
|1999||The New Rules About Money - Rule #22 When Seeking a Mortgage, Use the Old Qualifying Rules.
“Therefore, if you buy a home by pushing this lending limit to its extreme, or by using some of the no- or low-money-down loan programs that are available today (because you have to, not because you choose to), you face very real financial risks.
|October 2003||INSIDE PERSONAL FINANCE NEWSLETTER – Are There Children in Your Future?
“An ARM is never the proper solution to a ‘let’s save money situation…’”
|June 2006||INSIDE PERSONAL FINANCE NEWSLETTER - Your Mortgage Payment is About to Rise. And you probably don’t know it
“Some homeowners will see their monthly payments double or even triple — putting a big squeeze on the finances of millions of American homeowners.
|August 2006||INSIDE PERSONAL FINANCE NEWSLETTER - Have You Seen Those Ads Touting 1.25% Mortgages? Here’s the fine print.
“But these teaser loans let you pretend that the rate is 1.25%... That’s one heckuva savings, right? Wrong. You see, the $209 that you ‘saved’ actually gets added to your mortgage balance. Thus, after one month, your mortgage balance is now $100,209. Repeat next month. And the month after that. Soon, the party will be over.”
|December 2006||INSIDE PERSONAL FINANCE NEWSLETTER – Is Your House Worth What You Think It Is? Probably not, but don’t blame real estate prices
…homeowners are discovering that their homes aren’t worth what they paid for them because they paid more for the houses than they were worth at the time they bought them…55% of appraisers told October Research Corp. they felt pressure to overstate the value of a property; 10% said they felt pressure in more than half of their transactions. And one third feared they would lose business if they didn’t comply with requests (demands?) to overstate the value.
|2007||The Lies About Money – Chapter 13
In discussing a rate that just seems too low: “The difference between making payments based on a 6.75% rate and a 1.25% rate will be added to the mortgage balance, meaning the client will owe the bank much more in five years than the $600,000 originally borrowed.”
|August 2007||INSIDE PERSONAL FINANCE NEWSLETTER, - How Will the Subprime Mortgage Crisis Affect Investments? Bonds impacted more than stocks
“Don’t buy bonds. Instead, buy bond mutual funds. These investments acquire hundreds, even thousands of bonds. The diversification helps to reduce the risk that something might go wrong with an individual bond.”
|October 6, 2007||The Ric Edelman Show
“So the bank’s attitude is, who cares if you default? It’s not our risk; we are shoving the risk over to Wall Street and its investors, many of whom are ordinary individuals who buy mutual funds whose mutual funds buy the collateralized mortgage obligations and the collateralized debt obligations that have been created through all this nonsense. So they were willing to say, we don’t care about the long term; we are looking for the short-term transaction revenue.”
|Nov 17, 2007||The Ric Edelman Show
“Why then am I officially worried? It’s because of the sub-prime lending crisis.….I mean, who owns the mortgages? We know that these mortgages have been packaged into investment products. They used to be called CMOs, Collateralized Mortgage Obligations. Then they became CDOs, Collateralized Debt Obligations, when they became involving debt other than just mortgages.
And now you’ve got these newfangled things called SIVs, Structured Investment Vehicles. And investors are buying up these SIVs and these CMOs. Well, who are those investors? Now, traditionally, most people figure that those are mutual funds, particularly bond mutual funds, have been buying them up. But in fact, what we are now discovering, a great many money market funds are buying up these securities.”
|May 3, 2008||The Ric Edelman Show
“The bond market is a huge market place that consists of a wide variety of U.S., corporate and international bonds, some of which are very safe and conservative, others of which are very aggressive and speculative, like the sub-prime lending crisis, collateralized debt obligations, etc.”
|1999||The New Rules About Money – Rule #49 Derivatives Are Here To Stay, So Get Used to Them
“Today, derivatives have gotten a bit exotic… For the most part, the derivatives market is new and untested. We do not know how some of these investments will fare, say, during a stock market crash, if interest rates rise, if high inflation returns, or if some nation suffers political instability or war. That uncertainty translates into substantial risk for investors in these instruments… They’re also a terrible investment.”
|January 2001||INSIDE PERSONAL FINANCE NEWSLETTER – How Muni Bond Investors Lost 70% in a Single Day — and How It Can Happen to You
“You could lose your entire investment if the bond issuer runs into financial difficulties. You could have trouble selling your bond, simply because no one wants to buy it.”
|October 2002||INSIDE PERSONAL FINANCE NEWSLETTER - Are Brokerage Research Analysts Idiots or Crooks? Either way, their recommendations cannot be trusted.
“How else can you explain that, of 50 companies that filed for bankruptcy earlier this year, according to Weiss Ratings, Inc., analysts at the nation’s largest brokerage firms were still offering “buy” recommendations on the very day that 47 of the 50 filed for bankruptcy.”