“Shoddy” Lending Practices Led to Subprime Lending Crash
As the housing demand (or rather, the lack thereof) precipitates a mortgage rate drop, there are rumors flying about that the Federal Reserve may contribute its own interest rate cut to the mix. Indeed, there are rumors of an emergency Federal Reserve meeting to be held, and the Fed has already pumped emergency funds into the banking sector to keep it afloat. Indeed, after stating not too long ago that the subprime lending crash was contained, Federal Reserve chairman Ben Bernanke has been faced with the uncomfortable truth that the problem is actually contagious, as Bloomberg points out:
“The subprime mess is now spreading to banks,” says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. “A lot of international banks, especially those in Europe, did invest a lot in the collateralized debt markets, especially the subprime situation here in the U.S., so they’re suffering.”
And the U.S. has it even worse. But how did it come to this? Well, the Wall Street Journal today makes it very clear today that the problem has been lending practices that did less than due diligence on verification and documentation. Indeed, many people who probably should not have had home mortgage loans got them — and then ended up in foreclosure. The Wall Street Journal reports on these “shoddy” lending practices:
Lending practices in the subprime market were “shoddy and absurd,” said John Makin of the American Enterprise Institute in March of this year. Lewis Ranieri, former chairman of Salomon Brothers, echoed those comments in this newspaper when he observed: “We’re not really sure what the guy’s income is and . . . we’re not sure what the house is worth. So you can understand why some of us become a little nervous.”
The results? Well, you can probably get a good deal on a house. And you can probably get a good mortgage rate now. But you have to have good credit. And you have to have more documentation. So it’s harder to do. But if you can do it, you might end up with a good deal.
Tags: home mortgage loans, subprime lending crash, mortgage loan, Ben Bernanke,
emergency Federal Reserve meeting, Wall Street Journal, mortgage interest rates
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