Charles Brown writes: >> CB: If your money is secured by the house, why are you taking any risk at >> all ?
Charles -- read the paper. Sub-prime mortgage lenders are falling like cards. Home lending is not risk-free. Even in the prime market, there are defaults. Foreclosure is not inexpensive for the lender to administer. Furthermore, there is the risk that interest rates will change. In other words, if I am a lender and make a home loan at 5% for 30 years, I am locked into a specific interest rate for a long time. If interest rates go up, I am limited in my ability to liquidate my 5% investment and invest at the higher rates. Alternatively, if interest rates go down, the borrower can refinance me out and I am looking at a lower rate. (Prepayment penalties have some ability to reduce the latter risk.). >> CB: So, they are compensated for advice , not for the loan of money ? I think you are again confusing questions. Of course the investor is paid for the loan of the money. But we are discussing the societal "value" added by the investor. Imagine two entrepeneurs who came to an investor in 1980. One had a great idea for making better typewriters and the other for making bettern portable computers. If the investor invested in the typewriters, we know in hindsight that the money would have essentially been thrown down the drain with a net loss to society compared to the investment in portable computers. The decision to invest is not made blindly by investors. They do due diligence and provide a lot of intellectual firepower to investments decisions. The investor is an integral part of the process of determining the allocation of capital. David Shemano
