A derivative is a complex hybrid financial and insurance instrument which “ derives ” value from underlying assets or benchmarks like interest rate direction trends . Some financial analysts have stated that the total value of all global derivatives may be somewhere within the $ 1,500 to $ 3,000 trillion dollar region . If so , these derivatives dwarf all combined global assets by a significant multitude .
Because so many banks , investment firms , and insurance companies are heavily invested in one another partly by way of derivatives , this was why the Federal Reserve , the Bank of England , and other central banks around the world had to step in and bail out these multibillion or multitrillion dollar financial or insurance entities , directly or indirectly through others like Bank of America . If not , the global financial system would have fallen like a chain reaction of dominoes .
Later , the LIBOR ( London Interbank Offered Rate ) Scandal , which came to light publicly in 2012 , gave us a glimpse of the sheer magnitude of the derivatives market . This financial scandal was about how certain financial institutions invested or bet on the future direction of interest rates tied to LIBOR ( the benchmark interest rate at which major global banks lend to one another ) while claiming to be rigged or known ahead of time so that the derivatives bets had a better chance of success .
Several publications like Rolling Stone magazine wrote articles about the LIBOR Scandal potentially being the largest financial scandal in world history that affected upwards of $ 500 to $ 700 trillion in global assets . The named financial institutions in various publications or lawsuits which were alleged to have benefited , directly or indirectly , in the LIBOR Scandal included Deutsche Bank , HSBC , Barclays , Citigroup , JP Morgan Chase , and the Royal Bank of Scotland .
What ’ s important to understand is that many of the best known banks in the
world may only have a few trillion of depositor assets in their checking and savings accounts today . However , they may have exposure to upwards of $ 50 + trillion in derivatives . As a result of their financial exposure to derivatives , these banks may be unwilling or unable to make investment property loans to even their most creditworthy clients partly due to tighter lending restrictions that came from the passage of the DoddFrank Act back in 2010 .
This is why mortgage brokers and their nonbank lending partners became the better funding solution for investors while “ handshake deals ” at local banks don ’ t matter as much because so many banks may be technically insolvent .
Ironically , it was claimed that delinquent subprime mortgages represented less than 1 % of all financial losses related to the Credit Crisis or Financial Crisis . Rather , the complex derivatives investments that were leveraged 50 + times the original amount of investments such as interestrate options were the root cause . Sadly , mortgage professionals and stated income subprime loans still continue to be primary scapegoats . As a result , fewer banks are willing to offer more flexible residential or commercial property loans that don ’ t verify income .
Value Analysis for Commercial Properties
How lenders analyze income and expenses for commercial properties can be quite complex and overwhelming . Properties that do not meet most or all of these stringent underwriting guidelines may be prime candidates for assetbased loans .
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