Tuesday, December 4, 2007

Subprime Debacle Traps Even Very Credit- Worthy

Subprime Debacle Traps even very Credit Worthy. I found an excellent article by this same title at the Wall Street Journal on the front page of the December 3rd, 2007 issue. I would like to quote from some of the article that I found extremely relevant.

begin quote, "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."endquote.

This causes me the reader of the article to ask, "Why weren't the borrowers with good credit steered automatically toward fixed rate loans as they always were in the past by reputable loan officers?"

This is also answered in the article as follows: begin quote "The subprime sales pitch often was fueled with faxes and emails from lenders to brokers touting easier qualification for borrowers and attractive bonuses for mortgage brokers who brought in business. One of the biggest weapons: a compensatory structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for.

Credit scores run from 300 to 850 and many involved in the business view a credit score of 620 as a historic rough dividing line between borrowers who are unlikely to qualify for a conventional, or prime loan, and those who may be able to." end quote.

To someone who only sees himself as an investor these quotes are red flags like the storm flags put out in a harbor put out to help prevent sailors from dying in a storm at sea. So now let's address accountability and there doesn't appear to be any!

begin quote."Lenders say they aren't responsible for borrowers who may have been reckless in their real estate investments or their finances, or who have their own reasons for considering loans with subprime terms. 'There are many borrower requests and situations, and multiple risk factors in addition to credit grading that go into loan underwriting decisions and often do result in borrowers with good credit grades accepting subprime loans.' countrywide financial corp. spokesman----" end quote

Next we deal with an analysis of defaulted subprime loans.

begin quote, "---An analysis by Fitch Ratings of 45 subprime loans that went delinquent early in their lives--even though the borrowers had an average credit score of 686--concluded that 'these loans suffered in many instances from poor lending decisions and misrepresentations by borrowers, brokers and other parties in the origination process.'" end quote.

So as an investor looking at all this I see the whole thing has been a nightmare from about 2000 AD. of Borrowers being deceptive, Loan brokers being deceptive and all this worked only because housing prices were going up but like children's building blocks laid to the ceiling this was a structure designed to fall with the slightest hiccup. My question as an investor is how do we create "building codes" so this doesn't happen again?

How many widows and their children who didn't know anything about all this and trusted the system have been financially wiped out or partially wiped out worldwide that only had investments in mortgage vehicles that included some subprime?

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