Much of the concern about the shaky sub-prime real estate mortgage market centers on how portfolios of institutional investors will be affected, but there is also some concern about the potential ripple effect on boomers and their savings efforts.
Rating agencies ramped up their examination of this market segment’s financial health this week downgrading bonds backed by riskier home loans associated with the sub-prime market.
The move follows earlier rating agency reports. For instance, in an April 20 report, Moody’s Investors Service, New York, reported sub-prime mortgage loans originated in 2006 “continue to exhibit comparatively poor performance versus loans originated in recent prior years.”
The good news for insurers is that exposure to the sub-prime market “appears to be very manageable” for them, says Scott Robinson, Moody’s vice president and senior credit officer in a June 2007 report.
But for individuals, it is potentially a different matter. The ripples that spread from any drop in the sub-prime market may roil individual boomers’ retirement plans, says Ray Benton, a certified financial planner with Lincoln Financial Advisors in Denver.
One concern, according to Benton, is that a credit crunch could exacerbate an already declining housing market, spreading to the economy at large and causing a “serious recession.” Such a scenario could impact boomers “in many ways, including a decline in employment opportunities for those who plan to slip in and out of the work force,” says Benton.
A second possible impact on boomers, he says, is on some defined benefit pension plans, particularly for marginal companies which may end up in financial difficulty. The difficulty could arise when a company has an underfunded defined benefit plan and is counting on stock market performance to counter that underfunding, Benton explains.
Finally, Benton says that if the economy is weak, and the Fed is forced to lower interest rates, and other central banks raise rates, a further decline in the dollar could hurt boomers who are living or plan to live abroad in countries like Mexico.