Subprime's fate was sealed from the start.
By Brett D. Sherman
What made subprime lending work on a mass scale was the easy credit that Wall Street (and the federal government) wanted and the Fed delivered. Unconscionably low interest rates.
The true bubble of this decade wasn't in home prices, and it wasn't in home mortgages. The bubble was a credit bubble. The Fed dropped its benchmark rate to historic low levels and held rates there for longer than ever before. Financial institutions were up to their necks in cheap money. So much cheap credit was available for so long that, among other effects, (a) competition among financial institutions for cusdrove interest rates down for all types of loans (everything from credit cards to commercial and residential mortgages), and (b) .
interest rates on all types of yields on and eager to lend.
Excess availability of cheap money meant banks had lots of money to lend. So much cheap credit was available that , in fact, that it was hard to find profitable uses The subprime explosion happened because subprime lending with money so plentiful fit perfectly into Wall Street's securitization model. By expanding from prime loans to subprime, Wall Street had all of the mortgages it could handle (for a few years anyway), and the mortgage-backed securities machines were humming all over Manhattan.
From the beginning it was clear that the dramatic increase in subprime lending had to end badly. Now, we know what you're thinking. You were about to say that we are engaging in a fraud by hindsight analysis. No way. The subprime boom was a big part of the lend to securitize model. In " lend to securitize," loan quality was virtually irrelevant. Loan volume became all-important. When volume is king and quality a peasant, and lenders are giving adjustable rate mortgages to people with bad credit histories (people who almost by definition have had serious problems paying bills in the past), there absolutely, positively must come a day when interest rates rise, where home inflation slows, when the whole flawed system implodes.
This is no hindsight argument. This is common sense. Believe us, Wall Street understood the limited shelf-life of subprime from the very start. The subprime model helped investment banks make a fortune while interest rates remained at or near historic lows and home prices were rising at an unprecedented pace. But this is a dynamic economy. Interest rates could not stay low forever. They never do. And when the Fed did raise rates in 2004, it took about a year to a year and a half before the brakes really started to slow down the housing market. Once prices leveled off, and then started to fall, the subprime market was done.
It was always just a matter of time.
Comments