The Subprime Mortgage Mess, In A Nutshell

The Subprime Mortgage Mess, In A Nutshell


Big thanks to Jimmy for this.

The text may be hard to read, so I’d suggest just going full screen with it. It’s very easy to read at that size.

  • John DeFelice

    The sub-prime/economic mess; putting the politics of the situation aside, the US is facing a crisis of economic policies of business that have perpetuated for years.

    Credit scoring, long the foundation of mortgages , loans, insurance, and even job evaluation, is at best little more than a calculated risk based on trying to predict the future based on statistical evidence from the past. This is a flawed logic. Noteworthy of this was the Enron credit rating system which alleged to predict credit worthiness.
    The reality of Fico/credit scoring/etc.. is that it is little more than an economic expediency to save money by using a scoring system instead of doing an evaluation of the credit candidate. The premises of the scoring has no more ability to predict the future than any other random event ( (stock market for example) and actual scoring models themselves prove themselves to be inaccurate.
    Take for example the case of the bankrupt person with a job. Most would assume the person to be a bad risk. Little is done to investigate the reason for the bankruptcy from a scoring point. The default makes the person a “higher” risk. Contrast that with the person still carrying too much debt, the lenders have now conspired to push the person into bankruptcy to seize assets, or drain the person over a period of years by charging usurious rates and penalties. The latter shows a greater risk of default than the former, yet the rating for the former is lower???
    Based on the rating the former is charged more for insurance, find less medical care, and find it harder to change jobs or residence. These are but a few of the consequences. Yet the credit card companies will bombard the former bankrupt with new credit offers? Why is this? Debt generates profit not ability.
    Looking back at the business world for thirty five years (something I can do) you see a continual move towards creating indebtedness of the individual. You see the creation of the ARM, No-interest/balloon mortgage, common usage of second and third equity loans; I could go on but the point is instead of controlling debt our financial institutions have devised ways to not truly assume the risk.
    Lenders that “evaluate” debt then sell off their debt continue the poor evaluation practices that allowed them to take on debt in the first place. The lack of professionalism in the debt industry is rampant- trying to judge debt on an objective guide of numerical rating is like looking at a racing form then saying “the fastest horse always wins the race”.
    Governmental reform or oversight will not solve the issues . In the first pace it will not be quick enough or effective. Pardon the cynicism but governmental “reform” will benefit those who can pay for it. Witness Bear Sterns, a near term crisis that the government stepped in on to prevent “bank panic”; well I don’t know any common laborer that had his checking or saving account there! But the default rate is costing Americans their homes in the thousands everyday, because of what the lenders did in their lack of oversight in lending to those who could not afford the profit vehicles of the lenders.
    It is always easiest to criticize but what is needed are fewer corporate bailouts. This is not a solution without continuing pain for the individuals, but until the lenders and other users of “credit scoring” move to real evaluations based on case by case expensive time consuming examination of the individual, our current economic system will remain flawed and we will continue to face realties of future meltdowns.

  • harsha

    nice site. I often used to refer it..

  • Chris

    What I find interesting now is the massive backlash the lenders are going through. Even on Government loans like FHA and USDA, they are making it so difficult for good borrowers to get financing.

    It’s like they have swung from one extreme to the other in an attempt to make loans that aren’t going to be considered subprime or risky.

    Until they loosen up a bit it’s going to be worse and worse for people.

  • Kyra

    FHA restrictions seem to be growing by the day. We had a wholesale AE in our office yesterday and he seemed completely flustered by the increasing regulation. Its getting harder and harder to stay in the industry.