Sub Prime Mess!

Runt Rants - Psst! Can we talk?! Sub Prime and Alt-A Part Three

In the first of this series on the Sub Prime and Alt-A meltdown we talked about how individuals could solve a problem between a lender and a borrower when circumstances change and the loan can no longer be retired under the original terms. The damage is minimized, a new arrangement that suits the borrower's ability to pay is agreed upon, and the underlying asset is protected. Problem solved.

Part Two discussed the sub prime market, put it in prospective...a growing but still small part of the US Mortgage portfolio of loans. We pointed out that the products were not new, their performance histories easily tracked, and the future performance could have, should have, and likely was well known. No surprise that we are where we are.

Today's Part Three will focus on the originators of the sub prime and Alt-A portfolios and their very different mindset compared to traditional lenders. We'll also discuss the changes that are occuring in those originator sources, and the impact that has had on creating the problem we have today. We'll present one view of the solution, not the likely solution, but one that should be taken.

Wow. It's been three weeks since my last post, where I promised to wrap up this little series on Sub Prime, Alt-A and whatever else this crisis in progress can include. It ain't gonna happen. Wrap up isn't possible yet. I've been watching, reading, listening, feeling the pulse of the market with my own personal stethoscope and seismometer. Don't know about you, but I'm alternatively overwhelmed and underwhelmed with this one.

I'm overwhelmed with the seismic shock waves that have reverberated from what is in essence an isolated event. It's a disturbing reminder that today's Flat World is truly interconnected. I sneeze, someone in China catches cold. The Countrywide CEO makes a few badly advised and perfectly ill timed remarks in public and liquidity dries up. Small people can effect global business.

A mini panic occureds as a result of everyone in the daisy chain of the last three years realizing they've been stupid. Not had, not hoodwinked, not swindled, but stupid. If there is a tag line for the Summer of 2007 it has to be "Nobody saw this coming!" What a perfect tag line, what a banner headline, what a perfect attempt to pass the blame. What a crock!

Make no mistake about this. Let's be very blunt and clear. Everybody saw this coming. The players with equity stakes...the borrowers, the mortgage brokers, the mortgage lenders, the investment bankers, the hedge funds, the niche investment managers and their invisible but massive capital funds sources....they all saw this coming. They simply chose to look the other way. To hope history would not repeat, at least not on their watch. If history did repeat, they hoped to pass the costs and the losses to others. They were living in the moment, enjoying the inflated revenues of the moment, knowing that those revenues, those profits were excessive, and they hoped someone else, later, not themselves, would pay for their lack of provision for the future.