4 Subprime Myths That Could Derail Reform

subprime, subprime, subprime, subprime. subprime to go.

What is sub prime? Sub prime sounds like a submarine sandwich with prime meet. The average banker does not understand sub prime lending, yet alone consumers.

Sub prime loans were created and continue to be a bottom line equation for the banks and investors ( easy money ) make a loan to those who need it, but can not afford it, and in the process let's all make some money. Sub prime lending is a bottom line approach to lending. Sub prime loans were created for investors, and not the average consumer. When the average consumer gets involved with equations and averages that boggled the bankers and investors minds, well you can only expect to create a mess, which is exactly this lenders' mess that we are all in; because we are all effected by it. Let's be truthful about the situation, this is a lenders' mess not a housing mess or consumer mess. Banker and Investors knew what they were doing and they did it anyways, hoping exactly for what is happening today. They were all hoping for a government bail-out, which is exactly what is happening. And we the tax payers will pay for this bail-out. Lenders' practices have been and always will be the 8th wonder of the world, because very few actually understand them and even fewer practice them. We all know what a rate is. We all know what a loan is. But, what about the principles, the factors, the equations, the policies, the short term goals, the long term goals of the lenders. Well, that my friends is a mystery and it will always be a mystery. In the mean time let's keep our heads above water and hope, but also pray for a miracle. But, also let me remind you all that God is not in the banking business.................................................................................................

Louis Mendez of CA @ Apr 19, 2008 15:48:47 PM

Consumers dumb, bankers dumber, taxpayers dumbest

So, we learn that mortgage consumers have no idea what they're buying. I blame schools who don't try to teach such things and teachers who probably couldn't figure it out either anyway.

What I don't understand is bankers that took so much risk. Why? Bankers are conservative types that know they'll make plenty of money with minimal risk. High levels of risk are unnecessary in banking.

What I find truly frustrating is that the taxpayers will end up bailing out people who should be left on their own to learn a valuable lesson, don't sign contracts that you don't understand and can't afford.

As the old saying goes....Fool me once, shame on you. Fool me twice, shame on me.

At this point, taxpayers are getting fooled daily. What a shame!

Eric Strickland of MI @ Apr 07, 2008 14:14:30 PM

Subprime myths.

The Bear Stearns assets will never decline by another

$1 billion, let alone $20-30 billion. The Federal Gov't will end up risking nothing on this deal.

We are looking at business practices that have worked successfully for 40 years that I know off, and would have continued to do so, except for excess inventory being put on the market, because the builders kept seeing demand, and Bear Stearns, in spite of having a valid business, facing a panic by some of its investors who wanted their money out right now forcing them to have to raise cash.

Nothing illegal, and not even much of any foolishnes occurred here, but some of our know it all posters will tell you the sky is falling because of greed/crime/Bush/anything else that strikes their fancy.

Sternberg of SC @ Apr 04, 2008 20:30:14 PM

subprime, prime, alt-a

Subprime is only safe for the lender when the loan amount is no more than 75% of the collateral and preferably 70%- and no subprime seconds allowed unless to a maximum of 75%- better at 70%. No verification of income- self employed/commissioned only and 65% maximum.

For the borrower- fixed for 5 years, one year pre-pay penalty no negative amortization- interest only OK and a higher rate to reflect risk.

For prime loans- Including secondary financing, not higher than 90% loan to value except for federal, community initiatives. Loans in the $650,000 plus range should be at 85% loan to value and so on.

Alt-A loans 80% maximum for those with excellent credit- matrix from there based upon credit grade and documentation provided. Nothing wrong with these loans.

No negative amortization on any loan period. Interest only is a good alternative.

Regarding mortgage brokers- lenders do not allow a markup of the wholesale price beyond 1-1.25 points. And limit other broker fees to $350. This will immediately get rid of the bad apples. There are plenty of good mortgage brokers-serving their borrowers far better than the banks.

alan baskin of CA @ Apr 04, 2008 17:32:09 PM

4 Subprime Myths That Could Derail Reform

There's a good reason that people bought more than thier means; thier Real Estate Brokers dazzeled them with castles and baffeled them with BS. "Don't worry we'll make it affordable for your and your so deserving family to occupy the mansion" is a story I have heard from a few friends who have gone through the pain in all this. My wife and I have been in the market to purchase a home for two years. Our first broker fired us after ten showings. She "couldn't please us." She continually showed us homes that were way too much house for us and were beyond ($400,000+) what we wanted to pay. We were very specific as to our housing goals to her at the outset.

There are also a few more tales in which it was explained to me how the price on a home can be manipulated up. I feel this has been one of the problems with the housing bust. When the mortgage rates came down, brokers adjusted up the price to where the market could barely tolerate the prices, not figuring that eventually supply will catch up with demand. Also there is the fact there were decreasing numbers of potential buyers that were comming into the job force that could afford such high pricing and the baby boomers looking to get out of thier homes and into something more manageable for thier later years.

I feel that some of the reforms need to target the brokers responsibility with this mess. First, a minimum of an Associates Degree before any broker can get thier license. Second, no commision. Housing is a very renewable commodity. All parties in a home sale has flat fees, except for the broker. They should recieve a flat fee as well. If they want to get rich quick as they desire, keep the price of a home down and move more product. Finally, if there is evidence that a client could not afford the home in the first place, the license should be revoked for a period of 90 days.

Eugene F Bois of NH @ Apr 04, 2008 16:46:56 PM

If it's so good...

"When the Fed brokered JPMorgan Chase's buyout of Bear Stearns, it took responsibility for $29 billion of troubled securities, money that will indeed come out of taxpayers' pockets if the whole portfolio turns out to be worthless. But the Fed will eventually sell the securities for something—and perhaps recoup most or all of the money it has pledged."

I love this argument. What makes you believe that recouping most or all of the money is even a remote possibility? If that were true, why didn't JPMorgan want the stuff? JPMorgan's actions in refusing to do the deal without the Fed backstop speaks volumes about the quality of the collateral.

What I would love to know is the face value of the collateral. If the Fed in effect bought $100 billion face value of collateral for $29 billion dollars, maybe you could conclude that they got a great deal--after all, how much further in value can it go down? On the other hand, it would show you just how bad the collateral is, and you could conclude that it will eventually become worthless. But we, the taxpayers who are now on the hook, will never know, because the Fed apparently agreed with JPMorgan and Bear to keep the details confidential. If this is such a great deal for the taxpayer, why the secrecy?

My bet is the stuff is next to worthless and the taxpayer is going to have to eat the $29 billion.

of FL @ Apr 04, 2008 16:45:55 PM

Subprime myths

The problem is fraud and lack of law enforcement. PERIOD.

Congress believes or falsely portrays that they will be able to legislate solutions, but while they are promulgating the chickens are coming home to roost.

Millions of subprime, Alt-A and prime borrowers were allowed, encouraged or coerced into loan fraud by overstating their incomes. Based on this fraud and the borrowing for the wars on terror we have an ENTIRE economy built upon fraud and debt.

1) Paulson should be arrested for aiding and abetting loan and bank fraud. While he was at the helm of Goldman Sachs most of this toxic debt was originated and sold through GS.

2) The constant blame placed on state regulators is false and only conceals the real problem. See Eliot Spitzer

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

3) Karl Denninger writes:

http://market-ticker.denninger.net/2008/03/articles-of-impeachment-bear-stearns.html

please sign petition

4) The Executive branch issued a directive to the FBI to NOT prosecute fraud for housing. Under the United States Constitution our President is charged with caring for the faithful execution of law. As alleged by Spitzer, Denninger and myself (FBI directive); this is not a question of negligence, but obstruction of justice.

We can easily and most appropriately point the finger at this administration for the housing crises. In addition we can point our fingers at Congress for not impeaching these crooks. Congress' laws and role in government are useless if they do not utilize their power to conduct impeachment hearings.

If we are ever to find solutions to this mess We The People need to wake up and get involved. Voting is not enough!

Michael Blomquist of CA @ Apr 04, 2008 16:30:20 PM