The Root of Subprime Woes

The weeping and gnashing of teeth, over the woes of the subprime lending market, and its negative effect on Wall Street, have not abated over the past week while I ignored newspapers, teevee, and all other media in favor of days spent on the west coast of Michigan soaking up the sun and enjoying the company of my extended family and friends.

As I read the many articles on this subject, I find myriads of supposed solutions bandied about.  These include blurbs which inform us that lenders are no longer offering 2/28 subprime ARMs, which is no big deal, as subprime lenders will still be offering 3/27 subprime ARMs.  Additionally, one can read headlines which announce No money down vanishing as mortgage option, which is just another illusory subprime woe solution waved before your eyes like a magic wand.

Plenty of blame is being cast about, also.  It’s Wall Street’s fault, it’s the subprime lender’s fault, it’s a decline in real estate values fault, and on and on.  But the actual root of the subprime market meltdown is the individual mortgage made to the high risk borrower, and the riskiness of each individual subprime mortgage has been ignored as thoroughly as the emperor strolling down the street in his new clothes.

You see the game cannot be played until one individual high risk borrower is approved for a loan, and then another, and another, and another is approved until enough high risk loans are pooled together to sell as a security.  The root of the subprime lending market’s woes is the individual mortgage, and here is why this is so.

Posted by on 08/06 at 05:13 AM

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