Paul
Okay, so people say they don't have much subprime loans.
This isn't commentary on any company, just the mortgage business in general.
"Sub-prime" as a descriptor seems to have some confusion in terms of what it means. Having been a mortgage originator, mortgage officer in two separate banking firms and a mortgage broker, I'll share my definition which also may be less than perfect.
To me the definition of "sub-prime" is anything that doesn't meet the FNMA underwriting guidelines.
The sub-prime lenders will dress up their descriptions of their product with more euphemistic terms like "Alternative A", but the experienced should not lose sight of the fact that the credit and/or character of the borrower did not meet FNMA's industry-wide standard.
Since FNMA has, through the ubiquitous use of automated underwiting, loosened its standards quite a bit over the last 15 years, those borrowers who cannot meet those standards ought never be viewed by investors as "safer" than others in the same sub-prime pool.
The only major consideration between sub-prime lenders IMO should be whether their mortgage exposure is solely first mortgages or not.
The 100% financings that were the rage for a few years recently probably consisted of a lot of 80% first mortgages and 20% second mortgages. The second mortgages would not have met FNMA guidelines so, by definition, were sub-prime. In foreclosure proceedings, there is usually not enough equity received to meet all the obligations of both lenders and the second mortgage holder usually walks away with nothing.....a total loss of their exposure.
If this housing downturn gets as bad as I think it will get, eventually, even the first mortgage holders in these 100% financings will suffer losses as they won't be able to recoup even their much more limited exposure.
I won't touch sub-prime lenders for quite a few years yet. They are likely to become much more shunned than currently and then, perhaps......
Timba |
