Taking a haircut and losing your shirt

Last week I wrote about real estate, mortgage, and investment terms for the Malaysia Star. Here’s the column in full:

This past year, one of the biggest trends in language was related to real estate, housing, and home loans.

Oh, yes, those dry worlds turn out plenty of curious terms.

Probably the biggest winner in 2007 was subprime, a word that is not new but which, inexplicably, appears in none of the dictionaries I checked. I suppose that is because until this year, it was an intangible bit of euphemistic jargon.

But now, with financial crises popping up at all levels, pretty much everyone understands that the adjective subprime is used to describe a mortgage or home loan made to someone who does not have perfect financial health.

Some subprime loans are called no-doc loans, a clipping of “no documentation,” meaning that the borrower had to provide only minimal proof that they could repay the loan.

Sometimes they are called stated income loans, since all the borrower had to do was to say that they made a certain income and the bank wouldn’t take any special effort to verify it.

Still other times, such loans are called liar’s loans, which puts the truth of the matter frankly. In order to get the loans, one could seemingly say anything the lender wanted to hear.

Yet another name for such loans is NINJA loans. NINJA is an acronym for “no income, no job or assets.” It plays off the idea of darkly clad Japanese ninjas, insinuating that someone is up to no good under the cover of darkness.

Some subprime mortgages and loans are the ones that start well but end badly. In those cases, the borrower took out the loan in good faith, the lender verified all the details, and everything was done as risk-free as possible. But somewhere along the way, the borrower began to fall behind payments and the once safe loan became risky. These are known as scratch and dent loans.

The term refers, in part, to a common practice in American department and grocery stores, in which merchandise that has been damaged is sold at a discount. It could be anything: dented canned goods, stained clothing, or well-handled floor models (working examples of products that are set out for customers to examine in order to be sure that what they want to buy does what they want it to).

On Wall Street, investment companies figured out years ago that they could make safer investments out of these risky and scratch-and-dent loans by bundling them together and then retranching them. “Retranch,” from the French retrancher, means “to recut.”

In other words, investment companies take all the debt together and sell it to investors in a variety of new packages. That way, if any one of the risky mortgages failed to be paid back in time, the loss would be spread across many investors.

Of course, over the last two years, some investors have taken a haircut on these bundled investments, meaning they have had to bear large losses. They took what money they could get for them, but overall, they lost their gamble and get less back than they put in.

Of course, it isn’t just big faceless investment companies who are losing their shirts – going broke or going into debt. Homeowners are, too. Some of them are finding that their mortgages—another name for a loan against the value of a house—are exploding ARMs.

ARM is an acronym for adjustable rate mortgage, meaning that the percentage that the borrower pays to the bank above and beyond the amount originally lent can change depending upon market conditions or rates set by the government. ARMs “explode” when new interest rates are so high that the borrower can’t afford to make payments.

As more people have failed to pay their mortgages, there are now too many houses for sale and the value of all houses has dropped. Some homeowners find themselves upside down, meaning that the amount that they still have to pay for their houses was more than they could get for them if they tried to sell them.

Now the real battle comes in trying to sell a house for any amount at all. Some people used drama-pricing. It means to dramatically drop the price for which you’re selling your house.

The term first surged to popularity in 2006 as a kind of amusing little toy of a word, but last year, as the American real estate market began to take a dive (to fall rapidly in terms of number of houses sold and in the amount that they were selling for), the term took on all the more seriousness.

A less common synonym, trauma pricing, sounds to me like the perfect term for the tangled financial mess.

Posted January 15, 2008

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