FLIP THIS IDEA

12/3/07

Today’s Wall Street Journal outlined the results of a study of $2.5 trillion in subprime loans made since 2000. The study found that (Surprise!...to anyone but regular readers of the Insightful Pontificator) that many so-called subprime loans were made not to the underemployed, the marginally making it, and other denizens of the lower rungs of the economic ladder. No, many of these loans were made to people with good credit scores who were relatively well off and who perhaps live in your neighborhood. These borrowers were either too lazy to go through the backbreaking work of actually filling out a mortgage application (doubtless because they had other things to do, like watch the latest mind-numbing episode of their always excerebrose favorite situation comedy), didn’t want to, or couldn’t, document an income qualifying for a far cheaper prime loan, or, most likely, were able to borrow more with a subprime loan than they could with a conventional loan. They simply wanted to buy more house than they could afford or decided, after watching an episode of “Flip This House” or some other fatuous offering from the supposedly high-brow cable networks that offer an “intelligent alternative” to the completely idiotic network fare, that they were now fully qualified real estate investors to whom the price of a loan didn’t matter because they would be out of the property at an enormous profit long before the real costs of the loan began to bite.

So, again, this is not a problem only for those “other people” who barely merit the notice of their betters. The “sub-prime” problem affects places like Naperville, IL, Smithtown, NY, and Shaker Heights, OH. Many of your neighbors are stretched beyond their financial limits. The damage will by no means be limited to the WalMart shoppers of the world. Tiffany, Nordstrom’s, Mercedes, BMW, and other such supposedly safe havens of those “not affected at all by the crisis” will soon start to feel pain, lots of it.

But it’s even worse than that. The Journal study was limited to sub-prime loans. Wait until the rest of the world finds out what Insightful Pontificator readers already know: that the Alt-A and prime mortgages are not in such good shape, either. As mortgage lending standards deteriorated, loans that wouldn’t have been made ten or fifteen years ago are classified as prime today. As one of the great men in the financial world, my first boss in the money business, said years ago when his bright young junk bond analyst presented deals that looked promising from the perspective of that 26 year old kid, was often heard to say as he shook his head in disbelief “We’ve come a long way, haven’t we?” The problem is that, during the last ten years, as mortgage financing has become more, er, enlightened, the people in charge have been not much, if at all, older than that 26 year old kid and, if I may say so myself, not as bright. There is no longer the distinguished, older gentleman in the office down the hall with generous dollops of experience, wisdom, and gray hair to restrain the enthusiasm, and the avarice, of the financial wunderkinds who can still remember their first shave.