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.
Jeremy Portnoff, a certified financial planner with Portnoff Financial, Piscataway, N.J., does not see a long-term problem with the sub-prime market. “It might rattle things up a bit,” but a recovery will bring stronger lenders and an opportunity to make money. Although lending will tighten in the short-term, in the long-term it should loosen, according to Portnoff.
But for the clients of some planners, it is the short term that counts. Kevin Brosious, a certified financial planner and president of Wealth Management, Allentown, Pa., says one client got closed out of a mortgage because the bank told her they were getting more “picky” about who they loaned money to. The client, according to Brosious, had previously discussed the loan with the bank and “thought it was a slam dunk.” The implications to her financial plans were “significant,” given that “she had already committed to a private purchase of a home and even had money down,” he added.
Boomers could see a hit in their portfolio if they had a large exposure to banks and financial services companies who have sub-prime securities or provide credit default swaps, but overall, the impact to boomers should be minimal, says John Deyeso, a certified financial planner with FinancialFilosophy, New York. Even if the markets panicked, it would be short-lived because the “sub-prime disaster is not market wide,” he continues.
Deyeso adds that houses financed by sub-prime lenders might not be “ideal” boomer retirement areas, so it might be limited to certain areas and not the overall housing market. A slowing housing market is creating better prices, but that is more of a function of the Fed and not the sub-prime market, he adds.
Reverse mortgages could be impacted, but only if the home is surrounded by sub-prime foreclosures, which would bring its value down, Deyeso says. Reverse mortgages depend on three things, he explains: the current mortgage rate, the value of the house and the willingness of heirs to repurchase the house, keeping banks out of the home owning business.
Jim Holtzman, a certified financial planner with Legend Financial, Pittsburgh, says the sub-prime market will probably not have much of a direct impact on boomers.
However, in a more general way, it may affect the economy and thus boomer investments, he continues. When adjustable rate mortgages begin to reset, “money will be sucked out of the economy,” he says. So, if a portfolio has a weighting in stocks tied to consumer spending, then that portfolio will be affected, Holtzman notes.
Diversification offers a counter to this risk, he says. Legend Financial is looking at international securities and real estate holdings as opposed to just an exposure to these markets in the U.S., Holtzman says.