Sub Prime

All the activity next door makes me listen to the financial and economic news with a little bit different ear. It becomes more of a real problem when you see it happenning.

I will set aside for a moment the reports that the "Credit Crisis" is sending ripples through the economy at large, causing our economy to falter and possibly sending us into a recession. That doesn't seem possible, but I'm no expert. For me personally, business is better right now than it has been in 9 years.

This all started when some financial geniuses decided that the "sub-prime" market was ripe. My understanding of the term "sub-prime" is that people that have crappy credit ratings and no money for down payments are eligible for these loans, and nothing better. So some greedy corporate schemers rubbed their hands together and devised their plan to make billions in profit. They hatched their plan into the perfect environment. The stock market had underperformed, and people were looking for the next good place to invest their money. They knew that the government enviroment nowadays is geared toward leaving corporations alone when they aren't writing legislation to specifically benefit them or removing regulatory hurdles. Bush is pro-business, everyone believes. So they geared up some new "products" - loans custom made for unsophisticated borrowers with bad credit, and they flooded the country with one of the most aggressive ad campaigns seen in years. I'm sure you've seen all the stupid banner ads with people dancing spastically, saying "Interest rates are going down again!" and "You're eligible for a home loan!"

So they got these poor saps to sign fat contracts for loans with a fatal flaw embedded in them. Sign up and your payment is x per month, but after about a year it becomes almost 2x per month. "My house payment went up and we can't afford it!" was the common cry that went up all over the land. "Stupid people got in over their heads," was the callous comment heard most often around the water cooler.

I disagree. A complete lack of regulatory oversight as well as sheer stupidity on the part of the lenders is the problem here. If you're approving someone for a loan, you know how much they make. If you slip a provision that jacks up the payments after a year, you could probably do the math and figure out that they won't be able to pay and that it's a bad investment. Lack of regulations lets you hook in people without even making them come up with a down payment. So even if your plan was to set up people for failure and then take possession of their homes, it's still a bad plan, because you're not even going to profit from their down payments.

Then the perfect storm happend to make this into a full blown crisis. Lots of people rushed to make these loans, they started going bad in huge numbers all at once, and the bottom fell out of the housing market. It takes a long time to sell a house right now, and you will never get the full price in today's market. So suddenly it's not a bunch of ignorant borrowers that are feeling the pinch, it's big banks.

What a fiasco. Imagine rich investment types, used to pulling in 6 and 7 digit incomes watching their net worth evaporate away in a matter of months. These are the type people that used to fund political campaigns, so is it any wonder that they are also the people with access to power and influence? So who gets the first big bail out? Bear Stearns, an investment bank with some of the bluest of the blue bloods gets access to a line of credit to stabilize it while it is on life support. I have no doubt that the other lenders that pushed us into this mess will get similar support and bailouts in the months to come.

Meanwhile, let's hope that the people that got fooled by these bad loans in the coming months can afford their rent if the economy does slip into a recession.

Masters of the Universe? Time will tell.