Middle class boomers have become desperate to fund their retirements, as a low interest rate environment is killing their annuities and other fixed income components of their IRAs and 401ks. Their generation has a component who simply doesn’t feel comfortable with stocks, due to their volatility and risk, going for more solid steady returns of bonds, treasuries, annuities, etc. But this means for them, in a low interest rate environment, their portfolios are barely staying afloat, with little or no real growth. Some of these have taken matters into their own hands, competing with the world’s largest investment banks for a piece of the sub-prime pie. Marketwatch reports:
Barry Jekowsky wanted to build “legacy wealth” to pass down to his children. But the 58-year-old orchestral conductor, who waved the baton for 24 years at the California Symphony, didn’t trust the stock market’s choppy returns to achieve his goals. And the tiny interest earned by his savings accounts were of no help. Instead, Jekowsky opted for an unlikely course: He became a subprime lender, providing his own cash to home buyers with poor credit and charging interest rates of 10% to 18%. It may sound risky, but “it helps me sleep better at night,” he says. “Where else can you find [these] returns?”
It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children. There is no official data, though it’s estimated that at least 100,000 such lenders exist — and the trend is on the rise, says Larry Muck, chairman of the American Association of Private Lenders, which represents a range of lenders including private-equity firms and individuals who are lending their own cash. “We know the number of people who are doing this is increasing dramatically — over the last year it’s grown exponentially,” he says. Read full article
As if it wasn’t enough this market caused one of the world’s greatest financial crisis in modern history in 2007, retail investors who really can’t afford to lose, are jumping at high returns. The reason the banks aren’t lending is because of the real risk. Borrowers who turn to these amateur hard money lenders are likely refused by banks, probably with reason. In any event, it’s not the fault of the borrowers, the economic landscape couldn’t be worse; unemployment is past depression levels, the velocity of money is at an all time low, the prospect of finding new employment is near zero for many job seekers, and the markets are being supported by an out of control Fed with QE policy that’s not only likely to continue but to increase.
The point being, for these amateur lenders, in an environment like this, the chance of the borrowers defaulting increases exponentially. These lenders are not only betting on the borrowers, they are betting on the state of the economy.
Further Reading
http://money.msn.com/now/post.aspx?post=71dfc141-b3ae-4ee3-88dc-837e7a990290
