Comments on: What does “Subprime” really mean?

By: aditi

aditi — Sat, 29 Mar 2008 06:22:04 +0000

nice article….

By: Shoebox

Shoebox — Fri, 28 Mar 2008 16:29:27 +0000

Headless,

Absolutely right! The spread off of LIBOR should have given these at best, a BBB rating when sold. It’s exactly your point that shows the level of fraud that was perpetrated by the rating agencies.

By: Headless

Headless — Fri, 28 Mar 2008 16:13:30 +0000

I read the linked article and had a couple other details jump out at me.

“It was a teaser rate in the sense that once resets began, the interest rate would be based on Libor plus a spread of 6.22 percentage points.”

WOW!!! These were really desparate and REALLY IGNORANT buyers to agree to those terms.

“However, the payment shock would have been greater for a majority of the borrowers, because many loans were 30-year loans to be repaid on a 40-year amortization schedule, while others had an interest-only option for the first five years. In both cases, the unpaid balance was always higher than if the principal was to be repaid over 30 years.”

These were bubble buyers. This is the same mentality of ‘got to get in now because prices can only go up’ that led the 1990’s dotcom stock market crash. They were so desparate to get in that they took on huge risk without understanding what they were doing. Normally, some grown-up (the bank) will say “No. You cannot afford to pay this back.” But the lenders were too greedy to act sensibly.

I hope they enjoyed their six-figure performance bonuses.

By: Shoebox

Shoebox — Fri, 28 Mar 2008 14:46:58 +0000

Now that you mention it….
Elliot Spitzer was the guy who got the stock “analysts” removed from putting “Strong Buy” recommendations on IPOs that their company was underwriting. I haven’t heard that Elliot has gotten another day job so maybe he’d take it pro-bono?

By: steveegg

steveegg — Fri, 28 Mar 2008 14:35:24 +0000

That reminds me of the brokers’ stock ratings. They’ve always seemed at least a grade off, and they were always loathe to put a stock into the “sell” category.

I guess Lake Wobegon made its way to Wall Street, and they’re just beginning to realize that not everything is above average.

By: Shoebox

Shoebox — Fri, 28 Mar 2008 14:19:34 +0000

That was kind of my reaction when I read the study. I think it is very abstract for most folks.

What really pisses me off is the rating agency giving it AAA. I’ve worked for a few companies that had subprime commercial debt and I know what that means in terms of spreads and interest rates. By rating this AAA they were committing outright fraud. I would think there is a huge class action suit waiting to happen.

By: steveegg

steveegg — Fri, 28 Mar 2008 14:08:57 +0000

I wonder if the average Joe’s reaction to the subprime mess would be just a bit different if they knew just how “sub” it was.

By: Headless

Headless — Fri, 28 Mar 2008 13:02:36 +0000

Thanks for posting this, I had no idea of any of these facts. These lenders got what they bargained for.

I’m mad too. Investors (you & me) had these (insert bad word here)-up mortgages purchased by our mutual funds. I’m paying a fee to the fund managers to “manage my funds.” If I want to gamble with my retirement, I’ll visit my friendly neighborhood Indian gaming facility and have fun while I do it myself.

By: bill-tb

bill-tb — Fri, 28 Mar 2008 12:40:50 +0000

Subprime == Unqualified borrower.

Look up “ADDI 2003” on the HUD site for an explanation. This brilliant piece of legislation abolished loan qualification, because it was ‘discriminatory’.