Subprime Mess – A Layman’s Explanation

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My inspiration for this post came from a short cartoon a client emailed to me. It was hilarious. Before I start, I also want to say I am not an economist, just a guy running a commission advance business and trying very hard to offer a service to agents as safely and responsibly as possible in this crazy market. If anyone disagrees with this summary or feels I have missed something, I invite your comments.

So what exactly is the “Subprime Mess”? Talking heads on TV give summary opinions as to what is going on but for the average person the whole thing is kind of confusing. “Subprime” has become a very generic, overused term. To understand it, we need to explore its roots…

Let’s start with Joe Buyer and Moe Mortgage Broker. It’s 2006. Joe wants a house but not just any house, Joe wants a really nice one that’s bigger and five times more expensive than his current digs. Poor Joe Buyer hasn’t actually saved any money for a down payment and he doesn’t really think he can afford the monthly payments, but he really wants that house! Can Moe Mortgage Broker help? Of course! Moe Broker is operating under the premise that house values will always go up, so lenders don’t really need down payments anymore. On top of that, Moe Broker explains he can even get Joe Buyer into the house for a really low interest rate for a few years. Raising the rate later won’t matter because Moe’s premise is totally sound: house values will always go up. Joe Buyer is excited by this news...

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