About 16 times as many subprime loans were past due in 2006 as in 1998. — Washington Post, December, 2006.

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All investors have been taken aback by the subprime mortgage mess, but the most conservative investors have especially disturbing concerns. After all, mortgage-backed securities (MBS) are usually considered among the safer investments, backed by the valuable paper of debt obligations signed by people who have had to prove they can afford to make the required principal and interest payments.

Investors know they’re taking a risk if they invest in a fledgling high-tech company with a “great idea.” Putting money into an MBS product might casually be considered nearly as safe as a Treasury — with a greater yield. As everyone knows now, the subprime house of cards came tumbling down, denting several well-known firms in the process.

Air into a bubble?

After every financial crisis — and the subprime mess led to the credit crunch that roiled the markets and caused huge write-downs from some major banking firms — investors ask, “Why?” What did mortgage lenders think when they devised a “low documentation” loan process, meaning applicant finances were scrutinized about as much as your application for a library card.

What of safety and risk and yield under such circumstances? Some firms avoided exposure to the subprime fiasco because they relied on their own disciplined, unbending credit analysis approach — meaning that analysts investigated the underlying characteristics of the proposed investment and just said, “No.” Raymond James Chairman and CEO Tom James said earlier in the year that the firm “has virtually no exposure to the subprime business.”

No undue risk

A conservative approach to basic investments may be less exciting than other approaches — but the subprime situation illustrates its value. Firms that avoided subprime investment exposure are those who were unconvinced by the AAA credit ratings applied to some of these securities, were suspicious of their yields (which were higher than yields of other securities with similar maturities) and, in some cases, their lack of full documentation.

Several more questions arise when considering MBS investments. Where were these loans made? As it turns out, California and Florida led the pack of states where housing price gains were fueled by speculators. Were the loans for primary or secondary residences? Defaults trend lower on primary residence loans. Is the loan-issuing firm known to apply stringent or not-so-stringent lending standards?

One subprime lesson is clear to everyone: those who didn’t enter this swamp in the first place avoided getting stuck in the muck. Financial firms generally advise investors to seek success only after due diligence and thorough investigation — good advice that some in the industry apparently thought applied only to everyone else.

If you have questions about any of your investments, please don’t hesitate to call me.

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This article is provided by Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145. If you have questions please contact Darcie Guerin via Email at Darcie.Guerin@RaymondJames.com. Phone (239)389-1041, toll free (866)-343-0882 or at www.RaymondJames.com/Darcie.