As I sit here near the end of the last week of October 2008 writing this piece, I ask myself: ‘Peter, what's the answer to those questions in the title of this article?’ Since I was a subprime lender/mortgage broker/banker and one of the pioneers of that industry sector, I feel if anybody does, I should know! Because as surely as the Sun rises in the Eastern sky each morning, helping all the non-prime people across America absolutely cannot be ignored … so it’s not whether or not it will return, but more HOW and WHEN it will re-emerge.
I’m reminded of my August 25th Blog post about The 3C’s of Credit and how obvious it was that those ‘tried and true’ guidelines were ignored by the entire subprime industry after the 1998 industry ‘correction’ … and all the way up to this week. It was almost like those in charge bumped their head and forgot - you can only borrow as much as you can afford, and the scheme of risk-layering with ever higher loan-to-values with increasingly ever lower credit scores, is what made little good sense for this credit challenged population of applicants during the past decade.
As to its new ‘form’ or shall we say the “HOW’ … we must get back to the basics, exotic and alternative product types (i.e.: No Doc, Stated, Option ARMs, etc.) are blatantly idiotic with non-prime borrowers. All they tend to do (because it’s like giving presents to children) is bring in Gigantic production numbers, Big front end commissions, and subsequent non-sustainable Losses that Kill the Golden Goose; foreseeable by anybody with even modest credit granting skills.
My friend, Paul Muolo, Executive Editor, National Mortgage News has recently written a great piece about ‘What Went Wrong in the Credit Markets/Will Subprime Ever Come Back’ click here where he’s authored a very good historical road map about this industry sector; I think he’s done a superb job with this. Among a lot of great information or all of you to learn about, his view here seems to me, to wonder aloud will helping these subprime customers return. However, I know Paul to be an optimist and a very smart guy, so he'll come around!! If you simply look at this from an economical viewpoint, ‘where there’s a vacuum, generally somebody will be there to fill it’ … and given the money to be made from non-prime loans (read Paul’s numbers … 10 to one over conventional/conforming), yet another group of new funding source will jump in … then WHEN you wonder? It’s my prediction that will start soon after TARP ‘finally’ kicks in (and Treasury sheds its recent flare-up of ‘ADD’) and the Treasury is buying those TOXIC mortgage assets clogging up the capital markets (almost 40 days later today not bought even one yet!). That will be the time the bell will ring! And, if I still had $500,000 (needed to start properly) lying around myself, I would be back in the wholesaler subprime biz in a big way personally!
Before today’s economic crisis, back in April, I wrote an article titled the ‘Future of Subprime’ (it was in The Mortgageland Journal’s April edition) there I said the Annual Production numbers should be around $65 Billion one year out, given the credit quality standards which need to be followed once again.
So don’t look for eye popping production volume amounts, but solid profits and a great industry niche to be associates with!
Government Intervention
We're living through some interesting times in our industry. First, the passage of Housing and Economic Recovery Act of 2008 (Public Law No. 110-289) was a very good idea, it will help a wide-cross section of Americans in so many ways (I translated it from Lawmaker/legislator back into English over a 3 week period in my Blog during August in case you don't want to read the seven inch stack of paper containing all the words in that legislation); it enabled the subsequent take-over (and a $200 Billion 'cash injection') of Fannie & Freddie which was long overdue (got to straighten them out, they both been plagued with corruption, scandal and 'looting from within' for a decade), and THAT keep the CEO's of Fannie & Freddie from leaving with Big severance packages (they tried to get out of town with $25 Million, but 110-289 stopped that.
Because of the heavy risk AIG has in insuring-backing many mortgage instruments (CDO's, MBS, Credit Default Swaps, etc.), they would have made a much bigger mess in our economy had they failed, they were/are too important to fail (plus all the Government did was make them a BIG [well secured/collateralized] $85 Billion loan then another one for almost $40 Billion after their $500k 'retreat'). Given what's been happening in the credit markets, all of this was necessary ...
Today's $700 Billion capital markets stability deal (TARP) now re-named the the Emergency Economic Stabilization Act ('cause the Senate had to add nearly $200 Billion in PORK to it), Hank Paulson has put together with Congress, it will make capital flow once again (in a lot of places here and abroad), but especially in the mortgage finance sector (that's been choking lately - or at least that's the theory) ... and THAT'S real good for homeowners and everybody in our industry. We'll get through this; now on to it's 'leisurely implementation' and then on to long over-due regulatory reform.
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