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Is The Subprime Disaster Really A Disaster?

By
Mortgage and Lending with Cognicorp Mortgage Banking Advisory

News Flash - Even though there's trouble in subprime land, lenders haven't stopped lending to SOUND borrowers buying real estate that isn't overvalued.

Much like the Dot Com implosion a few years back didn't ruin the Internet or the technology sector, the subprime correction will not ruin the real estate or mortgage industry. In my opinion, it's macro long-term effect is more of a fender-bender in the economic parking lot.

I remember shaking my head in the late 90's when the dot-com companies were hemorrhaging red ink on their P & L's and investors in a frenzy chasing high-yields continued investing billions of dollars into companies with no intrinsic value.

Isn't that exactly what happened the last few years in the subprime sector?

Now fast forward to 2007. The dot-com and technology companies with intrinsic value survived and those with no intrinsic value failed.

Again, isn't that what's happening now with subprime lenders?

While I have been discussing the macro concerns of the industry, I do have empathy for those whose concerns are more immediate and micro, such as:

  1. Individuals in the mortgage industry that lost their jobs over the last year
  2. Small mortgage bankers/correspondents who were left on the hook with loans on their warehouse lines and are left taking major haircuts/discounts selling their loans to scratch-and-dent investors
  3. Homeowners who were placed into bad loans, especially when better loan programs were available or those that maybe should have never purchased a home in the first place

For the individuals and companies outlined above, yes, the subprime implosion could be disastrous...if they let it.

I'm not speaking off the cuff, because I have been in situations one and two noted above. It's a matter of not being a victim, getting over what happened to you and making the best of it. The good aspect of our business is, if you are flexible and open to change, the business will take care of you.

No doubt about it, the mortgage business IS NOT for what my daughters call "weenies." To thrive, one has to develop a "thick skin" and ability to learn from your previous mistakes. 

Bottom line - The tightening of credit markets are happening where they should be happening. Good loans are still being approved and those loans that utilized "fog mirror" underwriting guidelines have gone away as they should have.

Word of Warning - Over the next five to ten years, the mortgage and real estate markets will find another financing darling vehicle that will self destruct again. The market always does and will again...don't get caught by surprise this time.

Comments (4)

Jason Vombaur
Keller Williams - Vancouver, WA

The market had to change some time.  Giving out stated loans with a 600 credit school is just asking for problems.

May 10, 2007 03:15 PM
Tony Gallegos
Cognicorp Mortgage Banking Advisory - Marietta, GA
Couldn't agree with you more!
May 10, 2007 03:19 PM
Esko Kiuru
Bethesda, MD

Tony,

Subprime lending was just a small section of the market, so its problems shouldn't shake the whole industry. This correction was needed to weed out the reckless players.

May 10, 2007 03:22 PM
Tony Gallegos
Cognicorp Mortgage Banking Advisory - Marietta, GA
Esko - Agree, I have written about this more in depth on my blog the Mortgage Cicerone.
May 10, 2007 03:34 PM