Sub Prime any end in sight?

or they can.......legalize weed. Think of the jobs it would create. Think of the tax dollars those leaches can suck up of those jobs.

Why is our government so closed minded?

PoseidonsNet said:

u know this is the single biggest
effect on my financial life right now
i live in south africa
the other side of the world

has it hit bottom yet?
starting to swing up again?
just maybe, hopefully?

who are the ones responsible,
or is that firmly brushed under the carpet

Click to expand...

This is gonna be along one, you were warned.....

Yeah, join the crowd! I've been in the mortgage industry for about 20 years and talk about an effect on a financial life!?! LOL

Not close to bottom, I would say the start of the bottom is at least 18 months away, I'll explain why in a sec.

Swings upward will happen in isolated areas here and there but probably will not be stable and will easily fall until the rest of the country is on the upward trend. This won't happen for a while, real estate cycles are typically on 7 year cycles both up and down, we experienced a longer than usual upward trend and I think we will experience a longer than average down trend.

I am not the for-most expert on this subject, not even close, but I do know a thing or two about this industry.

Who is responsible? Now isn't this the question of the hour...

Greed is #1 but that really isn't a "who", is it? Government conspiracy? Maybe, but not very realistic (personally I don't think anyones smart enough in the Bush regime to have pulled it off!! LOL) but they were complicit; if nothing more than just because of the ignorance they showed over such a major component of our economy being used as a large crutch for our economy with NO back ups or additional means of propping up the economy (...can you say all our eggs in a basket?)! Come on now, understanding diversity this is something even very unsophisticated investors understand, but this understanding is apparently not needed to be an elected official.

IMO the largest part of the blame should be placed on Wall St and the system they put in place in which shareholders are more important than the customers of the business's listed on the exchange. A company listed on the stock exchange becomes a 'public' company and as a public company they have a fiduciary responsibility to the investors to make sure that their money and investment is safe and will be returned with a profit. This is that business's PRIMARY purpose once they get listed, all other mission statements and goals surround this purpose. It is a vicious cycle and one that leads companies top exec's to do extraordinary things to satisfy the stock holders need to increase profits and stock prices'. You have to understand the very basics of this concept, philosophy and mentality first, before you can understand some of the other reasons and actions of these mortgage companies, they were basically acting on Wall Streets desires and gluttony.

The mortgage industry is a full circle economy now, public buys a bond, these bonds are backed by MBS (mortgage backed securities), these MBS's are large pools of loans, these pools are loans that have been purchased from wholesale lenders in bulk, the wholesale lenders get these loans from brokers that originated the loans to the public... I didn't really start the circle in the right place but it's still a full circle.

I would say the best way to think of it is, it's like the relationship between a drug dealer and a crack ho... confused Think of it as Wall St as El Heffa' (big boss, makes the drugs) with lots of dealers (wholesale lenders, the guys that get funding from the Boss and get credit lines to fund loans) these guys have different levels, from big ones that distribute only to other dealers to the guys selling on the street.) The smaller dealers hand out crack to all the good little ho's bringing back the nightly take, good ho's working it get lot's of crack, bad ho's get beat up, slapped around, degraded, raped, need to steal and do unsavory things to get the cash and if lucky, they get the scrapes and crumbs and maybe a hand out or two.

We had a 'Perfect Storm' in the mortgage industry and it create some of the best times for investing in Real Estate the world has ever seen! We had a period in the 80's when R.E. was rockin' but it was small in comparison. We had rapid appreciation, low interest rates and an economy that was slowing down and this was a shot in the arm like the public wanted. The public had enjoyed the Reagan/Clinton economy for years, good economy; Bush, fucked up a good thing (like father like son) got to a point that he had some of the worst public approval opinions, then 9/11 happens distracts public and the 'war' starts to spur jobs (hint, a job is considered created in the economy when some joins the military) and we all put aside our complaints about the Pres and stood behind him in a time we thought was a crisis, just like we should have done.

Large mortgage companies had a mad rush and were breaking record number of loans every year, year after year. This was going on for such a long time these companies couldn't envision an end. Then when things started to naturally slow down, these companies were starting to get scared about going back to it's shareholders explaining how things were starting to slow down and that profits might now be lower than expectations. Doing so would lead to many problems; like stock prices lowering, bonuses not being paid to employees, credit lines being reduced, lay offs, ect. And above all NOBODY wants to be the first to do this!!! Go figure, business slows down and people worried about reduced credit lines, way too funny.

One of the most profitable loans at the time was a sub prime loan. Well Duh? You lend to a high risk borrower, high risk property, high risk transaction and the risk is higher and in turn you should increase your interest rate to be able to compensate for this risk, thus giving you the ability to have enough reserves and profits to be able to handle the inevitable losses that WILL happen. Seems like the best course of action for a sub prime company or company offering these kinds of loans when things start to slow down, would be to tighten up credit and raise rates a bit to anticipate and avoid problems that can come from this, right? Well if this is what you think, then think again! Major lenders dealt with the problem of decreased production by LOWERING SUB-PRIME RATES!!! This was a failed attempt to compete within the market for loans and to drive profits for it's shareholders. Volume was the name of the game, we would make up for reduced individual profits by doing more numbers of loans. See at the time lenders were making 3-6% profits on these sub prime loans, when conventional loans (Freddi, Fannie and FHA) were typically 0.25 - 1.75% in profit for lenders, so you could see how this COULD be seen as a solution, reduce profits from 3-6% to the < 2% mark and you could offer an unbeatable sub prime loan rate and if you did enough of them it would make up for the loss, following so far?

This was the business model for New Century Mortgage, THE LARGEST originator of sub-prime mortgages in the country, they were #1. There biggest competition was Argent mortgage a privately held company, owned by Roland Arnall, I believe he was given an ambassadorship recently. Argent had to have a similar model to be able to continue to compete, the biggest advantage was that Argent was able to get it's costs under control a bit better than New Century, this allowed them to get better profits. This started a trend that just about every major mortgage company followed, follow the leader right?

Well, this works for sub prime lending when the market is on fire and home values are on the rise, but, if the market flattens out or starts to decline this can no longer work! Why? Simple math will explain, follow along:

Value of home 2001 = $100K
Mortgage owed 2001 = $100K

Value of home 2006 = $300K
Mortgage owed 2006 = $ 96K

In the above scenario if after 5 years the borrow defaults the lender has plenty of equity; they foreclose, sell property below market value say $175 and walk away with a profit (not as much as your thinking, just wait a sec)


Value of home 2006 = $300K
Mortgage owed 2006 = $300K

Value of home 2007 = $330K
Mortgage owed 2007 = $300K

In the above slight and slowing appreciation, lender has barley enough equity to sell property and now must sell at a closer to market value to be able to lessen losses. Remember they have lost at least 6 months payments that they still have to pay out to the holders of the securities, they were expecting income that now has stopped, they have to pay for foreclosure costs averaging about $3-5K+ then they have to pay 5-8% to list and sell property. Take all this into account an in a flat market they actually loose money, now think about when the value of the property above looses value!!!


Now, to wrap it up....

MBS have alway been considered a SAFE investment and were highly sought after as part of a varied portfolio for money managers and were bought up faster than you could put them out. When rumors of problems with house values being too high and that a bubble is starting investors worried and they started thinking they need to slow down or find a way to increase profits again. Once again Wall St steps in with a solution and decided that instead of being a middle man why not start buying these wholesale companies and they started playing chicken with these wholesale lenders and started driving down prices of MBS's and putting smaller lenders in financial trouble to make them more affordable by making these lenders buy back loans that the investors said were too risky, even though last week they loved em. This went too far and the market could not handle it and here we are.


Sorry so long but this is more complex than this and I could write a book on this stuff, mmm.....