Having been employed in the mortgage business, and particularly in the subprime aspect of it, I got to know it a little.

I have also learned to filter what I hear in the mainstream news – also known as the “driveby media”. When hearing reports about “subprime meltdown”, the real questions should be “what is the truth” and “is it really as bad as they would have us believe.”

To jump right on in with my opinion, I believe the answers are “the media conveys a few high-profile facts to us but largely excludes the truth in their reporting”, and “no, it’s not really as bad for everyone as they say – though for some of the constituents it is very bad”.

When it comes to subprime mortgages, yes they are a touchy subject for many. Let’s look at the constituents:

1:Originating lenders

2:Acquiring lenders (note buyers/holders)

3:Borrowers

4:End investors

5:The media

6:Everyone else

First, let me direct you to a good article that sheds a little light on the subject from perhaps a different viewpoint, and offers some behind the scenes insight.

With that in mind, I will try to be fairly brief here.

By the way, it was this [good] article titled “Q: How Big Is the Subprime Mortgage Market? A: Not Very Big at All” that inspired me to address this subject.

Now, about those constituents. The originating lenders are the ones who granted the loan in the first place. They are often the guys who ignored the poor credit information on the borrowers and made bad lending decisions for loans that were very likely to default. They pushed the interest-only loans as well as the low-interest-to-go-[outrageously]-variable-after-we-are-out-of-the-picture loans. They usually sell their loans as soon as they can, hoping to never see or hear about them again. In the business, they are called sellers.

Next are the acquiring lenders, also called buyers. Many mortgage companies both originate loans and sell (or keep) them, as well as purchase them from other originators. And, there are also buyers who do not originate loans themselves, but only buy them from others. One such company is EMC Mortgage Corporation, owned by Bear Stearns.

These buyers will usually securitize the loans as investments to be bought and sold in the investment marketplace; you have probably heard of “mortgage-backed securities”. Many times the buyers will require the sellers of the loan to warrant them against default by the borrower for a certain period of time.

The borrower is a key constituent, without whom there would be no need for a mortgage industry or any news pertaining to it. In the subprime market, the borrower usually has less-than-great – and even bad – credit. The borrower’s role is to get the loan, and in the case of the subprime failure scenario, to default on it. After default follows foreclosure.

When a securitized loan goes south, there is a lot of stuff that happens. One thing is that the security that people (end investors) have invested in when the loan is gets affected negatively. Also, the buyer of the loan will go after the seller to repurchase it if they can. Some companies like EMC are very judicious in their agreements with thier sellers as well as in the enforcement thereof. Many sellers (Option One is just one of dozens or hundreds in the past year or so) go out of business when faced with having to honor their representations and warrants that the loans they sold would be “good” for a certain period of time.

Now for a little of my own analysis. It is just a layman’s opinion; free, so take it for what it is worth… On slow news days the media is not too picky in finding something to write about. They would just as soon tweak a press release to look like news as actually pursue facts to report the truth.

Then there is you, me, and everyone else. In my opinion, whatever problems there are in the subprime mortgage industry are relatively limited and will take care of themselves in time. I believe that perhaps many large investment banks who deal in subprime mortgage securities might have been a little bit greedy and gotten lax in their business policies and are now starting to pay the price. Several big investment banks such as Lehman Brothers, Goldman Sachs, and Bear Stearns reported record earnings in 2006. Now following on, we are seeing negative reports about the[securitized] subprime mortgage industry. Maybe there is some correlation, and maybe for some more than others.

I also believe that a lot of the reports of subprime problems could also be used as an excuse by some companies to cover up other non-related mistakes and industry difficulties. For example, if the auto or airline industries start having problems, I would be very careful before believing that the problems were caused by the subprime mortgage industry. The same goes for housing starts and economic growth in general. The subprime mortgage market is reasonably finite, but is too often used as an excuse instead of a simple “we just don’t know”.

In concluding with my very brief blog post, I must agree with Ben Stein and Jerry Bowyer:

Regards,

Stephen Dunbar