- The Washington Times - Wednesday, September 17, 2008

As an escalating financial crisis continues to spread around the world, many small investors want to know how they will be affected and what they should do to protect their assets. Here is what some financial advisers had to say.

Q: What caused the problem that has been roiling the financial markets during the past year, most recently causing the bankruptcy of Lehman Brothers, the nation’s fourth-largest investment bank?

A: The root of the problem was Wall Street’s financing bad mortgages, according to Dick Lepre of Residential Pacific Mortgage in San Francisco. These bad loans included many subprime mortgages to people with poor credit, “no documents” mortgages to buyers who were not required to provide proof of income, and low-down payment mortgages that financed 95 percent or more of the home’s value. Wall Street investment banks bought these mortgages, packaged them and then either sold them or kept them in their own portfolios.

Securitizing these loans “was doomed from the beginning because it was a bad idea,” Mr. Lepre said. “A lot of losses need to be taken, and that is what we are in the process of doing.”

Q: How does the Wall Street financial crisis affect me?

A: If you own stocks, their value has been declining as the credit crisis has worsened and the economy has weakened.

The broad-based Standard & Poor’s 500 stock index plunged nearly 4.7 percent on Monday, falling below 1,200. It is down about 23 percent from its cyclical peak last October.

Q: What should I do with my stocks?

A: “My advice is, ‘Don’t look, don’t touch,’” said Alicia Munnell, director of the Boston College Center for Retirement Research. “This is a once-in-a-100-year event, and the idea of rebalancing the portfolio at the trough doesn’t seem smart,” she said.

Financial advisers strongly recommend that investors build diversified portfolios including both domestic and international stocks, bonds (both corporate and government issue), cash and federally insured money-market funds.

In today’s climate of great volatility, “the average investor is very much focused on safety,” said Bill Paternotte of Brown Advisory in Baltimore. To achieve safety, he said, “diversity is critical.”

Liz Weston, who authors personal-finance books in Los Angeles, urged investors with diversified portfolios to “ride out the storm.” Over long periods of time, stocks consistently perform better than other investments, she said.

Noting that the Dow Jones Industrial Average lost 504 points on Monday, she recalled the 508-point loss on Black Monday in October 1987, when the Dow shed nearly 20 percent of its value. The Dow was at 2,700 before the 1987 crash. She pointed out that Tuesday’s closing level above 11,000 was more than four times the pre-crash peak of 1987, which was three-and-a-half times the Dow’s 777 level before the Reagan bull market took off in 1982.

Q: What has happened to the value of my home?

A: It depends upon when and where you bought it.

Between mid-2001 and mid-2006, average national housing prices increased nearly 70 percent, according to the authoritative S&P/Case-Shiller national home price index. In some markets, especially on the East and West coasts, the increases were much larger. This was the housing bubble that began deflating two years ago.

Since the middle of 2006, the national average home price has fallen 18 percent, and prices in Los Angeles and Miami have plunged about 30 percent.

Q: How has the mortgage market changed?

A: During the housing-bubble years, mortgages were easy to find and lending terms were lenient. “If you could fog a mirror,” Ms. Weston said, “you could qualify for a mortgage.”

Today, the subprime market has essentially disappeared, and interest rates have increased significantly for so-called jumbo mortgages, which are loans in excess of $417,000.

Mortgages are harder to get for many people because they cannot meet today’s higher standards, said Mr. Lepre.

Potential homebuyers must have good credit, a higher down payment, a steady job and good income, said Ms. Weston. If you meet those standards, she said, “the world is your oyster.”

However, even people with good credit and good mortgages have seen their property values go down, noted Michael Zweig, the director of the Center for the Study of Working-Class Life at the State University of New York at Stony Brook. “With good credit and good mortgages, they could find themselves owing more on their loans than their homes are worth,” he said.

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