Digital Dharma

The Middle Path, One Day At A Time

Not Pissed About the Sub-prime Crisis Yet? This Should Do It.

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An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.

In 2005, the peak year of the subprime boom, the study says that
borrowers with such credit scores got more than half — 55% — of all
subprime mortgages that were ultimately packaged into securities for
sale to investors, as most subprime loans are. The study by First
American LoanPerformance, a San Francisco research firm, says the
proportion rose even higher by the end of 2006, to 61%. The figure was
just 41% in 2000, according to the study. Even a significant number of
borrowers with top-notch credit signed up for expensive subprime loans,
the firm’s analysis found.  Subprime Debacle Traps Even Very Credit-Worthy – WSJ.com

Author: Bill

Stumbling down the Middle Path, one day at a time.

One thought on “Not Pissed About the Sub-prime Crisis Yet? This Should Do It.

  1. I know nothing about getting a home loan, but there ought to be a sheet of paper everyone seeking a loan sees that shows the annual-percentage-rate on the whole of the loan [including fees!] and compares that with what the person might expect for his credit rating and income.

    But also, we have to shake a finger at people who rather mindlessly sign documents without knowing what they’re doing. The government cannot completely keep people from doing stupid things. For a commitment as significant as a home loan, people ought to know that they should look around for a good deal.

    But what is most incredible to me is this whole economic meltdown. These large banks have sophisticated models that look at the risks of what they’re doing and what’s out there. It boggles my mind that no one seems to have known that those bundled mortgages weren’t going to large numbers of people who couldn’t pay them and that homes were being over-appraised.

    Unlike the tech-NASDAQ meltdown in 2000-2001, there is a way to test the underlying value of the base assets. Homes can be matched against the price of construction to see if they are being overvalued. This was a disaster in the making that should have been foreseen!

    Re statements:

    1. “There ought to be” is a useless espression. For very good business and political reasons, there is no law requiring such, and no lender is likely to implement such a thing on their own. Caveat emptor! has been the rule for millennia for very good reason.

    2. Do we really? There are many people (roughly 35-40% of the US population) who are functionally illiterate when it comes to both arithmetic and legalese, and it isn’t their fault. Many of them can’t afford lawyers to interpret such things. Others are bedazzled by sociopaths and con-men, and there are plenty in the financial markets. Still others are trapped by the old con man’s maxim: you can’t con an honest man. If someone who was really good told you he could save you $1000 on a transaction you were looking to make, how easily would you be fooled?

    3. The economic meltdown is a result of overproduction of housing (along with some other factors) that caused a sudden drop in the value of the average home. Most people operate pretty close to the limits of their finances. When loans became harder to acquire and rates went up, they were unable to accomplish the refinancing they’d planned to do in order to avoid the ballooning interest. They defaulted, and that depressed the market even more, because there came to be a lot of really cheap housing available, perpetuating a snowball effect. And snowballs always roll downhill.

    4. Finally there was inadequate government supervision of an open market that was created in the 80’s by the Reagan administration and which has run rampant since. Loans used to be issued by local banks who spent their customers money carefully, on people they’d been doing business with for years. Now loans are issued by companies with only a meager presence, if any, in a community. The paper is then sold to investment houses for a quick profit. How can anyone keep track of the viability of markets in an essentially unregulated marketplace where what “regulation” there is is by appointees from the industries being regulated?

    There are no simplistic answers. Try as we might to assign blame on someone else, we are all to blame. It’s our government that’s responsible for this mess.

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