I always have to laugh when I hear commentators present a label for a problem that simply proves to be incorrect. What started the subprime credit crisis and who deserves the biggest blame will be argued for years. As one of the combatants in this crisis (not by choice), I have my own opinion which will never be shared by today’s financial reporters. It is shame that pundits never take the time to get things right, as it is easier to learn from mistakes than to misunderstand the problems and try to get everyone to accept an incorrect hypothesis.
First and foremost, the subprime crisis only really concerned itself with one aspect of the subprime market: stated wage-earner loans. There were a myriad of different loans that were underwritten and funded by the subprime industry that made eminent sense and were successful, or as successful as most prime loans. But we made sure to throw the baby out with the bath water so we wouldn’t have to distinguish the good loan programs from the bad. They are all gone. The majority of the subprime borrowers took a subprime ARM for a short period of time—two, three or five years. They cleaned up their mess: late payments, too much debt or judgments and charge-offs. After the fixed period of the loan was up, they refinanced to prime loans at good interest rates. That is how the subprime industry was designed to work. And for the most part it worked very well.
Then many in the industry set their eyes on an untapped market: stated wage-earners. Nobody stopped to ask why we should put people in “stated income” loans with the borrower stating his/her income and not having to prove it, when these people had pay stubs, W-2s, and verifications of employment available for review. Stated loans were designed for the self employed who lack such income documentation, and if they had left it that way we most likely wouldn't have this crisis. Many lenders couldn’t resist the stated income loan market with its higher profit products, and the rest is history. When you allow someone to state income that can’t be checked (and wasn't) it is a license to lie, and boy did they!
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.