Consumer Law In the News

Is the Subprime Market Another S&L-Style Bailout Waiting to Happen?

This article from Richard Benson, a finance industry executive, seems to suggest “maybe.” (Link via PrudentBear).

Benson likens the coming debacle to the RMS Titanic smashing into the dreaded iceberg almost 95 years ago. Salient quotes:

we have been watching this iceberg for three years now, and investing accordingly. Anyone aware of the fraud and foolish underwriting that has been ongoing in mortgage origination should be honest enough to admit we’ve only seen the “tip of the iceberg” so far, and mortgage lending is heading straight towards a massive piece of ice.

The subprime market is overloaded with bad loans that have effectively smashed holes into the hull of this financial ship. It has been surprisingly easy for people buying a new house to borrow hundreds of thousands of dollars by simply telling the bank how much money they make — without any proof. It’s called a “stated income” loan, but many people inside the housing industry call it something else: a “liar loan” or a “NINA” (no asset, no income verification). Forty percent of the subprime market (about $400 - $500 billion of loans), is made up of these loans. At best estimates, half of all subprime mortgages had no income verification. This is no small problem!

The article goes on to explain how the securitization of home loans plays into the potential collapse of the subprime market, thanks to these so-called liar loans:

A mortgage company just funded $100,000,000 of subprime loans. Suddenly, the value of the loans drop when the credit spreads on the risky mortgage collateral moves wider before the mortgage company has an opportunity to sell the securities. Now, that package of mortgages that they paid $100 million for (and intended to turn into bonds and sell for a $5,000,000 profit) can only be sold for $90,000,000. Whoa! A $10 million loss!

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