The Wall Street Law Journal

The Subprime Con Game - a brief history of audacious greed.

Subprime's fate was sealed from the start.

By Brett D. Sherman; The Sherman Law Firm

Subprime Lending Was A House of Cards that worked as long as interest rates stayed low and housing prices continued to rise.  Trouble is, we live in a dynamic economy. 

In a dynamic economy, stock values rise and fall,  inflation rises and falls, interest rates rise and fall.  And the housing market is famously cyclical.  In other words, the odds of interest rates remaining at or near historic lows and housing continuing to boom for more than a few years at the most were pretty close to zero.  If you think your local lender or investment bank didn't grasp this very basic idea, think again.

When interest rates rose - as they eventually had to do - adjustable rate mortgages held by so many subprime borrowers adjusted right on up with them.  This was a major problem for those who could just barely afford their mortgage payments at the original payment level.  The potential saving grace was the home equity (which provided an additional source of cash) that homeowners enjoyed as a result of skyrocketing house prices.  Of course, many subprime borrowers - often encouraged or cajoled by subprime lenders - had already borrowed against this equity to do things like put in swimming pools, remodel the master bath, and install home theaters. These folks didn't have very much equity, if any, to draw upon when interest rates started to spike.  

Then, the predictable endgame.  As interest rates kept right on rising, the pace of the booming housing market began to slow.  Then home prices flattened out.  Then, in most parts of the country, prices started to dip.  Goodbye equity.  Hello subprime defaults.  And more defaults, and even more.  So long to the value of mortgage-backed securities, especially those backed by subprime mortgages. 

The death of subprime (at least in the form it existed from 2003-2007) wasn't just predictable, it was a sure thing. So why didn't the public - or even sophisticated hedge fund managers get it?  Because the whole enterprise was a scam, a con, and the people running the con - from lenders to investment bankers - had a vested interest in keeping the process as mysterious as possible.  At that, they unfortunately were quite successful

By Brett D. Sherman; The Sherman Law Firm

Subprime Lending Was A House of Cards that worked as long as interest rates stayed low and housing prices continued to rise.  Trouble is, we live in a dynamic economy. 

In a dynamic economy, stock values rise and fall,  inflation rises and falls, interest rates rise and fall.  And the housing market is famously cyclical.  In other words, the odds of interest rates remaining at or near historic lows and housing continuing to boom for more than a few years at the most were pretty close to zero.  If you think your local lender or investment bank didn't grasp this very basic idea, think again.

When interest rates rose - as they eventually had to do - adjustable rate mortgages held by so many subprime borrowers adjusted right on up with them.  This was a major problem for those who could just barely afford their mortgage payments at the original payment level.  The potential saving grace was the home equity (which provided an additional source of cash) that homeowners enjoyed as a result of skyrocketing house prices.  Of course, many subprime borrowers - often encouraged or cajoled by subprime lenders - had already borrowed against this equity to do things like put in swimming pools, remodel the master bath, and install home theaters. These folks didn't have very much equity, if any, to draw upon when interest rates started to spike.  

Then, the predictable endgame.  As interest rates kept right on rising, the pace of the booming housing market began to slow.  Then home prices flattened out.  Then, in most parts of the country, prices started to dip.  Goodbye equity.  Hello subprime defaults.  And more defaults, and even more.  So long to the value of mortgage-backed securities, especially those backed by subprime mortgages. 

The death of subprime (at least in the form it existed from 2003-2007) wasn't just predictable, it was a sure thing. So why didn't the public - or even sophisticated hedge fund managers get it?  Because the whole enterprise was a scam, a con, and the people running the con - from lenders to investment bankers - had a vested interest in keeping the process as mysterious as possible.  At that, they unfortunately were quite successful

Subprime's fate was sealed from the start.

By Brett D. Sherman; The Sherman Law Firm

Subprime Lending Was A House of Cards that worked as long as interest rates stayed low and housing prices continued to rise.  Trouble is, we live in a dynamic economy. 

In a dynamic economy, stock values rise and fall,  inflation rises and falls, interest rates rise and fall.  And the housing market is famously cyclical.  In other words, the odds of interest rates remaining at or near historic lows and housing continuing to boom for more than a few years at the most were pretty close to zero.  If you think your local lender or investment bank didn't grasp this very basic idea, think again.

When interest rates rose - as they eventually had to do - adjustable rate mortgages held by so many subprime borrowers adjusted right on up with them.  This was a major problem for those who could just barely afford their mortgage payments at the original payment level.  The potential saving grace was the home equity (which provided an additional source of cash) that homeowners enjoyed as a result of skyrocketing house prices.  Of course, many subprime borrowers - often encouraged or cajoled by subprime lenders - had already borrowed against this equity to do things like put in swimming pools, remodel the master bath, and install home theaters. These folks didn't have very much equity, if any, to draw upon when interest rates started to spike.  

Then, the predictable endgame.  As interest rates kept right on rising, the pace of the booming housing market began to slow.  Then home prices flattened out.  Then, in most parts of the country, prices started to dip.  Goodbye equity.  Hello subprime defaults.  And more defaults, and even more.  So long to the value of mortgage-backed securities, especially those backed by subprime mortgages. 

The death of subprime (at least in the form it existed from 2003-2007) wasn't just predictable, it was a sure thing. So why didn't the public - or even sophisticated hedge fund managers get it?  Because the whole enterprise was a scam, a con, and the people running the con - from lenders to investment bankers - had a vested interest in keeping the process as mysterious as possible.  At that, they unfortunately were quite successful

Comments

[MJ Jensen]

I agree with your article, problem is many many homeowners were left holding the bag with little to no support. The government was aware of the practices of the banks and continued to allow the banks to give out money with no accountability.

The new homeowners rescue bill is lacking compared to the mortgage bank bailout.

We will see where it all ends up at when all is said and done. my foreclosure blog