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A type of investment that few of us knew
existed a few months ago is likely to dominate our world this year: investment
in sub-prime mortgages. Jersey is host to
several investment funds that contain sub-prime mortgages. As the day
eventually comes around when these funds are required to produce audited
accounts the fact that some already may no longer be "going concerns"
will begin to bite.
Sub-prime mortgages are precisely that:
sub=below; prime=first-rate. Sub-prime=second rate, third rate or worse. Even a
first-rate mortgage is still a mortgage, a borrowing on which a debtor may
default. Sub-primes are below that quality for two
reasons: the quality of the borrower (low income, poor prospects); the
(dubious) value of the house.
On house values, the mortgage-providers
drove property prices upwards by making money available to so many new
purchasers....... And they obtained yet more money to do this by packaging and
selling-on (at a profit) the completed mortgages to other investors in Jersey and elsewhere. And now house prices are
falling.....and there are no buyers.....
It seems as though all parties (lender and
borrower) can rightly be described as "deceiving and being deceived".
The lenders have been 'deceiving' the sub-prime borrowers that
the interest they had to pay was 'competitive' - and 'deceiving'
the investment funds and banks that the re-packaged mortgages were worth
buying, even 'deceiving' the credit rating agencies to rate them
highly. The borrowers have also been 'deceiving'
lenders by entering into contracts that, deep down, they probably knew they
could not fulfil (unless property prices continued to rise).
Can both also be described as 'being
deceived'? Well, the lender was 'being deceived' by
the allure of profit. A high interest rate would ensure that, even if the
lender took into account a few extra defaults (because the borrowers and
properties were sub-prime), the lender would still reap handsome rewards. (The
lender’s staff who dealt face-to-face with potential borrowers were on commission
too, keen to make more by lending more.)
And the borrower was 'being deceived',
willingly persuaded that he could afford the high rate of interest that the
lender intended to charge. (The high rate was charged because the lender knew,
but did not disclose to the borrower, a sub-prime situation when he saw it.)
The fact that bank managers work for the bank and not for the bank's customers
is an important lesson. Same with mortgage providers....
"Deceiving and being deceived".
Paul’s second letter to Revd. Timothy in which these words are used to
describe people in the years then ahead was written in the First Century AD.
The letter was included in the Canon of the New Testament in the Bible because
early Christians were convinced of the letter's authenticity and relevance to
all Christians at all future times.
What happens now in Jersey
and globally? Well, there is a short term and a long term. In the short term,
national newspapers are using words like "sub-prime woes" and
"global credit crisis". In the
longer term 2 Timothy sees "deceiving and being deceived"
as a growth industry and, having brought that to light, Paul urges young
Timothy to persevere - through examination and continuance in study of one
particular resource.
"But as for you, continue in what you
have learned and have firmly believed, knowing… … the sacred writings [the Bible's Old Testament], which are
able to make you wise for salvation through faith in Christ Jesus. All
Scripture is breathed out by God and profitable for teaching, for reproof, for
correction, and for training in righteousness....
That may well be the only way to avoid 'deceiving'
others and 'being deceived' oneself.
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