Join Date: Sep 2002
Location: Augusta, GA, USA
Re: How SubPrime Really Works
While the little skit is cute, it is a little off. All loan programs start with the investors (HE WHO HAS THE GOLD MAKES THE RULES), not with originating lenders (brokers, bank, mortgage companies, etc ). In the absence of fraud within the origination system, the investor(s) get exactly they say they want - or they would not fund them.
The big problems did in fact start in the late 80's and early 90's with huge pushes to grant credit (home ownership) through FHA ( your government's sub-prime operation ) and to some extent FNMA it's sister.
The sub-prime / non-conforming market actually worked very well in the beginning as the investors that made the underwriting rules were the ones that funded and serviced the loans. They knew exactly what they were buying and knew the risks along with how to collect the payments. For example - First Union and Bank of America each had well run divisions that did sub-prime loans and they were good at it. They knew their market and knew how to service it. Then, Wall Street started pumping money into stupid loans at rates that did not support the risks, both companies dropped those divisions. (The then current stigma of doing sub-prime loans did not help as they were perceived as loan sharks - which they were not - but it helped shut down those divisions which had helped many people.)
When the big boys on Wall Street figured out how much money could be made with sub-prime (non-conforming) loans they apparently jumped in big time. Hedge funds also got into the market with neither knowing much about the risk or how they worked - nor did they seem to care. All they cared about was volume as that is where the money is. The result is what you now see.
It's easy as hell to make a really stupid loan with someone else's money, but it is hard to make one with your own. I know.
I do not think the bail-outs by the government is/was the thing to do - especially with the previous years mega bonuses given out for scam (pencil whipped) earnings.
Just my opinion.
Black 01, LTC
BMWRA & MOA, AMA, IBA