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The Sub-Prime

by David Stanowski
28 March 2007

If you have been wondering how the Housing Bubble was actually facilitated, some of the major players in this drama were the so-called sub-prime lenders. These are lenders who specialized in creating mortgages for people who, in normal times, would have trouble qualifying for a loan to buy a refrigerator. However, things got so crazy that many of these high-risk borrowers received 100% financing using ARMS, and other "creative techniques".

As their borrowers began defaulting on their loans, often after only a few months, sub-prime lenders started failing in droves! In fact, 44 sub-prime lenders have gone bankrupt just in the last few months!!

New Century Chart

The price history of sub-prime lender, New Century Financial, is representative of what is happening in this whole sector!

The following video contains an in-depth discussion of the current debacle by the guru of the debt markets, James Grant:

For a more personal view of what's happening on the ground, the story that follows is typical of what can be seen on web sites every day.

J.M.'s story was sent to Charles Hugh Smith:

I happened to catch the Senate Banking hearing last night on C-SPAN, and I am writing as one of the unfortunate homeowners caught in this Subprime nightmare. I thought I heard mention of assistance being offered to help homeowners stay in their homes, and I am seeking some assistance, if there is any assistance being offered. I am days, possibly weeks (if I am lucky), away from eviction from my home, which I have owned for less than 2 years. I have filed for bankruptcy protection, and my life is in shambles; no money, credit trashed, savings gone, low paying job . . . a mess.

I will be 53 years old, next month, just shortly after my world implodes on me. I have been a renter all my life, always dreaming of homeownership. In June of 2005, I was moving back into the State of California from Arizona, and I happened to see a cute little home for sale (1,200 sq. ft.), perfect for me. On a whim,,I went to take a look at it, knowing that I probably could not afford it, but I went anyway and fell in love with it, so, encouraged by my agent, I placed a call to her mortgage broker, and during our brief communication, he assured me that I could buy the home, so we placed an offer ($609,000).

Now, again, I was moving back into the state, no verifiable source of income. I did have a substantial deposit being made into my checking account ($85,000). My tax returns, or previous W-2's, check stubs, nothing was pulled to see if I even came close to earning the $12,000 per month that I was told we would need to state on the application to make this work. Three weeks later, I was a homeowner.

$609,000, 100% financing, 2/28, interest only, prepayment penalty, payments, no impounds, payments $4,200 per month. Fremont S&L funded this loan, and sold one loan to GMAC, and the other to Homecomings.

So, I began using my savings to make these payments while trying to establish my business to support my home. I have been unsuccessful in doing this. So, my savings drained, I took a job in an administrative support position with a mortgage broker, salary plus bonus ($1600 per month plus $500 per closing), based on my origination, and I am not an originator, I was hired as support personnel, so $1,600 per month income, $4,200 per month mortgage. My employing broker suggested that we refinance the house (9 months after I purchased it) to cash out some equity to hold me over until "my" bonuses kicked in. Stated income ($12,000 per month - She knew what I earned because she paid me), 100% financing, interest only, $655,000 loan amount, payments now $4,700 per month, no impounds, 40 year term with a balloon payment. I borrowed $37,000 more than I purchased the home for, and my net cash out was $9,900. (Resmae funded this loan) and promptly sold them to Saxon who is now foreclosing on me.

So, my question continues to be . . . What happens to me and other borrowers like me now?? 1 in 200, or 1 in 15, I believe is the new statistic. These one in 15/200 borrowers who just wanted “The American Dream” of homeownership . . . who were told they could afford “The Dream.” What happens to them/me? Is anyone going to address our tragedy? Has anyone thought about the lives of people being evicted from their “Dream?” Bankrupt in many cases . . . foreclosure . . . property values declining . . . no equity . . . no money . . . savings gone . . . credit trashed . . . facing homelessness because the reality is who is going to rent to us??? We are not good credit risks??? Some of us will never recover from this heartbreaking, and humiliating event. What do we do now?? Where do we go??

Personally, I will never recover from this. I am over 50. This was my first home, my dream, perfect in every way . . . I was a renter my whole life, and all I ever wanted was a home. What do I do now??

I am weeks, maybe days, away from foreclosure, and eviction. I filed for bankruptcy to erase my debt so that I can attempt to pay rent (that is, of course, if someone will even consider renting to me, and if I can find an apartment that I can afford that will take me and my two little dogs).

So, I will restate the question that I want an answer to, and that is: What happens to me and the more than one of every 200 U.S. mortgage borrowers whose lives are in shambles? How do we recover from this???? What happens to us?? Does anyone have the answer to this looming question? Have any of the fat cats who participated in and allowed this to happen thought about the fallout of their decisions to line their pockets?? We are NOT statistics, numbers to be reported. We are real people, real families, with real lives with a real, serious, HUGE problem . . . Who is stepping up to help us??? WHAT HAPPENS TO US NOW . . . ???

Should taxpayers bailout everyone who wanted to fulfill their "dream" with a $609,000 "starter house"? Should we feel sorry for someone who signed a loan application stating that they had an income of $12,000/month when their income eventually reached $1,600/month? Should the government be responsible for preventing people from taking this kind of insane risk? Should people be excused from their personal responsibility?

My answer to all of these questions is a resounding "NO!"; but there will be political support for this kind of nonsense, in this country, as it exists today. I include this story not to enlist sympathy for J.M., but to demonstrate that the first dominoes are falling, and they are headed our way! There are now untold numbers of people trying to make a $4,200/month payment on a $1,600/month salary! Their reckless choices are going to effect all of us!

These videos tell more of the tale of the unfolding Sub-Prime story:

For more information on Mortgages:


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