Wednesday, October 24, 2007

Rich Uncle Pennybags

Amongst the news items of the day was this gem, home sales hitting 8 year lows. Congress is talking about potential bail-outs for the poor mortgage holders who are facing escalating payments soon as their rates are reset. Foreclosures are escalating to unhealthy levels. I think I have to credit Jim Grant of The Grant's Interest Rate Observer for this observation. I think I might have come across it in one of his writings from year ago, but I'm not sure. One of the things that might have kept us out of this mess, both borrower and lender was a remembrance of the basic tenets of the old Parker Brothers Monopoly game.

Take a few minutes and pull out the old Monopoly board and the stack of property deeds. The two most valuable properties on the board, Park Place and Boardwalk sell for $350 and $400 respectively. Here's the lesson however. Let's say you want to mortgage these properties. On each Monopoly deed a Mortgage Value was printed. The Mortgage Value for Boardwalk is $200 and for Park Place $175. No negative-am, 90-100% loan to value here. Real-estate was traditionally understood to be an illiquid, risky asset and banks were hesitant to lend against it. That's why even the most prized Monopoly properties would only get you a 50 % loan to value.

Borrowers and lenders would both be much better off today if they had only adhered to these same principles. The game dates back to the early 1900's. It's true, there really is nothing new under the sun--- we should have paid attention.

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