Upside Down Mortgage

Subprime Securities

Question: If sub-prime lending is so risky, why do banks encourage it?

From what I understand, the subprime market is filled with predatory lending practices that prey on uninformed home buyers who are bilked into paying sky-high adjustable interests rates- but if most of them aren't even able to repay their loans in the first place, a fact in which most lenders are well aware, in what way is this financial sound for the banks? Who exactly benefits from sub-prime lending? Also, this recent housing bubble was largely a result of imprudent lending practices in the sub prime that engendered an industry wide collapse after home owners found themselves in tight financial situations. But if these mortgage backed securities are entailed with so much risk, why can't we simply get rid of subprime lending?

Answer: Sub-prime is long gone as a major business entity. And no income verification loans are not widely available any more either. Adjustable rate mortgages (ARMs) will always be around. There is nothing inherently wrong with ARMs such as the 3/1, 5/1, and 7/1. They are available as we speak with the lowest rates ever.

Sub-prime has the connotation that anyone who got such a product had a bad product and shouldn't have been in the loan. Wrong. There is a market in this country to make purchases and obtain new credit when your credit is not great. People with mediocre credit can get car loans, credit cards, mortgages, etc. Tons of people recover from whatever lowered their scores and they get back on a steady track. During my time in the business, I have seen many homebuyers improve their scores and apply to refinance out of their sub-prime mortgage.

There is a fallacy that huge numbers of buyers were tricked into getting ARMs. In fact, many people wanted these type loans because it was the only way they could afford the big house. The public seems to believe so many were fooled. But that's because we are only hearing the crys and screams from those who got stuck. Sure, some people got duped. But far more people knew exactly what was going on.

The sub-prime loan business was built on greed. Wall Street bankers and overseas investors just saw dollar signs and no one stopped to think or care. Too much money was flowing in for the moment. These loans were sold off again and again and making money for them hand over foot. Not a time for them to stop and question all that money. I wish I could remember where I read it, but I saw an article where one guy made over $500,000,000 near the end of the sub-prime fiasco as he betted on the market crashing. Sub-prime was bad for those on the low end of the totem pole. But the money guys at the top of the ladder sleep with duvet covers stuffed with money.

Did anyone see things clearly at the time? Sure, probably a lot of people knew the bubble would burst. But it wasn't going to stop them from getting their unfair share while the gettin' was goin'. Countless investment bankers, private equity groups, mortgage lenders, and money funds got filthy stinking richer from all this mess. Though many banks and lenders did go under, the guys sitting at the helm got their money, bonuses and buyout packages - even while the company was obviously failing.

The foundation for the housing and mortgage greed started with the notion that home values would keep escalating like crazy. Just as today investors want to buy gold because the value keeps rising, that's what was thought about housing just a few years ago - along with the notion that values would continue to rise indefinitely.

Helpful? Hope so.

Happy Holidays......

Zombie Financial Media: Report on sub-prime fiasco

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