Shorting sub-prime lenders

AUSTRALIA’S banks and finance companies are often criticised for ‘overly aggressive’ lending practices, but the locals appear to be paragons of virtue compared with the US.

Platinum Asset Management’s latest quarterly report has a fascinating – and disturbing - article on financial trends in the US.

It reports that intense competition has forced many US financiers into increasingly risky lending.

For instance, lines of credit and mortgages are provided at increasingly high loan-to-value ratios up to 125 per cent.

Chronic defaulters can obtain mortgages from sub-prime lenders and it is even possible to get a loan with no documentation (no proof of ID, no proof of income, etc) in rapid time.

Platinum has also found ‘strange practices’ among fringe lenders trying to make their books look better.

It has found mortgage lenders who give serial forbearances (ie deferment of payment) to borrowers so they do not have to show a delinquent account.

It also found an auto lender that delayed the sale of repossessed cars, because they only have to show a default when the sale occurs.

Platinum says these problems have increased as the economy has slowed and expects several of these companies will go insolvent.

It aims to profit from these failures by short-selling sub-prime lenders and other ‘over ambitious’ granters of loans.

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