Shoot-out at the Sub-prime Corral

During the post dot-com world of the early 2000s, the mortgage industry was reputed to be responsible for more new job creations than any other sector of the economy.  Exact figures are difficult to find because so many lending operations are buried inside larger organizations. Whatever the number, the refinance mania of 2002 and 2003 created a lot of jobs.

A disproportionate share of the jobs was added in the sub-prime arena where an industry was created virtually overnight. A large number of companies, as it turns out, are headquartered in my backyard in Orange County, CA.  So while I had a front row seat on the industry's growth, I am also watching this same industry come apart at the seams.

Those in the "responsible" end of the industry watched with dismay as we saw these lenders seemingly willing to lend to anyone! Not only that, their normal operating practices were questionable. Many borrowers who could actually have gotten A-paper rates were sold loans at B or C quality loan interest rates because that is what these lenders did.

They also, according to legal settlements, deceived borrowers as to the terms of the loans they were getting, failing to disclose things like severe pre-payment penalties that kept these borrowers in high interest rate loans for long periods of time, preventing them from refinancing into lower interest rate loans that they qualified for.

Finally, over charging was rampant. Loan officers who were previously making $10 per hour flipping burgers found themselves able to make $100,000 per year. And they did it all, not by helping their customers, but by deceiving them, taking advantage of them, and making egregious fees far greater than would have been charged ethically.

The industry is now in a state of imminent collapse with many companies shuttering their doors or firing employees and dramatically reducing the size of their operations. Just in the last week, every morning's newspaper carried a story about the demise of, or trouble at, another company.

Of those that are left, the market has savaged their stocks.  Short-sellers made a bundle on these positions with the stocks of many lenders dropping by over 50%.  In fact the only buyers today may be the short-sellers covering their positions.

The industry will now give up those jobs and those employees a lot faster than those jobs that were created. It will be interesting to see who will be left standing after the Shoot-out at the Sub-prime Corral is over.

Borrowers who may have been counting on those "liberal" sub-prime lenders will not find much help there. So do what we've said all along: straighten out your finances, starting with improving your credit standing. The better you do your part, the more help will be available to you.