Tuesday, January 22, 2008

Mr. Toad's Wild, Prosperous Ride

If you're just waking up and checking the TV, radio, or internet, you may have noticed that the Fed just dropped interest rates 0.75%, the stock market is down 3%, depending on the index you look at and when you check, and it's not a good day for corporate profits either (BoA and Wachovia, DuPont). In other words, the financial markets are freaking out. The financial boogyman has appeared, noticed that he economy is looking like it's slowing down a bit, and started uttering the word "recession"

If you're still lending (and it's mighty tempting to stand aside while the market sorts itself out), I highly recommend having a comprehensive strategy that attempts to mitigate the damages from the financial mess that the US has wrought upon itself. It would've been preferable to start this a few months ago, but welcome to the party if you're just arriving. Look for stable jobs in stable states. Look for loans that noticeably improve the borrower's financial condition as opposed to increase their debt load. So, what does this look like?

Risky loans:

  • Are in California, Florida, and Nevada (though Prosper doesn't technically lend here). Arizona, New Mexico, and Georgia aren't looking too great either, and Michigan is Michigan.
  • Have borrowers employed in real estate, finance and banking, construction, or are "self employed".
  • Are taking the loan to start a new business, expand their house
Safer loans:
  • Have borrowers employed in federal, state, or local governments with jobs like administrator, teacher, military, postal worker.
  • Are refinancing debt to a lower interest rate where the interest rate savings is obvious

1 comment:

j9359 said...

To risky category I would add high DTI and/or high utilization. Unfortunately a lot of people are very highly leveraged and just a slight negative change in circumstances (less overtime) and they are in trouble.
In the safer loans category I'd have to disagree about local government jobs, especially in states where real estate really took over. You kind of covered it in the risky loan section, but State and local government workers in CA, FL, etc are not looking like good risks at this point.