Glossary: Hedge Funds – HR 3915

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• Hedge Funds – speculative funds that make large bets on market movements. They use borrowed money to substantially leverage their returns (and losses), often at a factor of ten to one, or more. They purchase exotic securities and also take substantial short positions when they think the market or a particular sector of the market will go down. Such funds are extremely risky and are suitable for high-wealth investors only.
• By law, hedge funds are limited to 100 members. The minimum buy-in is usually at least one million dollars. In simple terms hedge funds are the race betting of the finance world. They are high risk, fast-paced and there is little reliable information available to help make the winning choice.
• High Cost Loans – loans that carry high up-front fees and may be based on the homeowners’ equity, not their ability to make the scheduled payments. Most reputable lending agencies will not underwrite a high cost loan because it is usually not in the best interests of the client and is highly regulated. Extra documentation, debt counseling for the client and an extended “cooling off period” are required to make sure the client is not being forced into something.
• Hope Now Alliance – a cooperative effort between the US government, counsellors, investors, and lenders created on October 10th 2007 to help homeowners who may not be able to pay their mortgages. On December 6th of that year, President Bush announced that representatives of Hope Now have developed a plan to freeze interest rates for some subprime borrowers who would not be able to make higher payments if their interest rate rose. This initiative is a response to the high default rate encountered when subprime loans reset after two years to an interest rate that is much higher than the original teaser rate.
• Up to 1.2 million U.S. homeowners could be eligible for assistance from Hope Now. The majority are those with ARMs and relief will come in one of three packages:

  1. Refinancing an existing loan into a new mortgage.
  2. Refinancing to an FHA secure loan.
  3. Freezing the current interest rates for five years.

• Housing Bubble – a type of economic bubble characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements. This happens periodically in a healthy economy and in recent years, most Western countries have experienced a similar exponential rise in real estate prices.
• HR 3915 – a piece of legislation formally known as the Mortgage Reform and Anti-Predatory Lending Act passed by the House of Representatives in November of 2007. HR 3915 requires brokers to place themselves on a national registry overseen by HUD. The bill also outlines changes in regulations that are meant to reduce predatory lending. Further details are available in Chapter Six of my book.

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