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Tuesday, April 1, 2008

:: sub prime mortgage and Indonesia

Sid H. Kusuma as published by detikFinance write a comprehensive resume on Sub prime Mortgage in US economy.

For the rest of you who didn't familiar with the topics, let's start with the linguistic terms. To put it simple, Sub prime Mortgage is a mortgage given to a sub prime debtor. in US, mortgage debtor was also rated (that's not happen in Indonesia). The credit firm heavily depend on 3rd party scoring company to classify the fitness of any mortgage application. there is FICO method for example, it give mortgage score of 300 to 850 on account of [1] Payment history 35% [2] Amount Owed 30% [3] Length of Credit History 15% [4] New credit 10% and [5] Type of Credit Used. Sub prime debtor is a debtor with FICO rate less than 620.

Sub prime debtor is a high risk debtor, to overcome this matter credit firm then compensates the high risk profile with higher interest rate as insurance of credit stream in accordance to higher risk higher return philosophy. High interest rate however is hard to sell, since people within sub prime area had less money to pay the interest rate, to overcome this, then credit company develop a product that is affordable by sub prime debtor at least in the earlier year of debtor payment period. The most famous scheme for sub prime mortgage in US is 2/28 ARM scheme in which 75% of Sub prime Mortgage originated, it has 2 years of lower (read: teaser) rate then after 2 years it become adjustable rate.

Problem with sub prime mortgage happen after the teaser period or the 'helping part' is over. Since the idea of teaser period was giving debtor opportunity to increase the quality of their financial performance so they could coup with the interest rate of their mortgage. But, what will happen if their financial strength didn’t get any better? This is the cause of Sub prime Mortgage crisis in US. After certain period of time, the credit quality plummeted, because debtor cannot pay their increasing installment.

The complexity of US economic allows this crisis to be delivered through contagion effect to overall country’s economic condition.

Indonesia not directly affected by this crisis since no Indonesian firm have significant investment on this sub prime mortgage and no Indonesian firm have significant investment on any company affected by the crisis.

But however, the crisis affect Indonesia too, the extraordinary volatility of exchange rate and stock market showing that Indonesian market not immune from the crisis’ contagious effect. Notably, Drajad Wibowo, a legislator at DPR (Indonesian parliament) have comment on sub prime crisis effect upon Indonesian economy that Indonesian economic growth would be lower than it is as predicted by Indonesian government. He said that government prediction of 6,8% of economic growth seems to be impossible, it is appropriate to say that Indonesian economic growth in 2008 only on 6,1% figure.

It is very reasonable for Dradjat Wibowo to say such opinion, since US as world largest consumer basis also consume Indonesian product. By the crisis, inflation are high, rates increase will slow people consumption in US, and if consumption is slow, demand for Indonesian product will be slower too.

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Thanks for this information. Because of that crisis Indonesian economy had changed. And I think till now is affected in someway.

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