The Icebergs Cometh Towards our Financial Titanic!

Today, the second largest sub-prime mortgage lender announced that it was near bankruptcy.

For those of you that do not know what a sub-prime mortgage is, it is a mortgage that was underwritten by a financial institution to individual(s) that can’t qualify under standard credit guidelines (translated: BAD CREDIT RISK)! These lenders took Wall Street money, which is usually money in Mom & Pop America’s retirement and mutual fund investments and channel it to these mortgage lenders who markup the money (lend it out at a higher interest rate) to compensate for the increased credit risk.

Your Captain is very familiar with this subject, because in my previous corporate life, I worked in both the securities and real estate industry (In fact, I worked for one of the Wall Street firms mentioned in the above linked article). For the last few years, these sub-prime mortgage originators acted as the housing equivalent of “second chance can dealers” and did all kinds of “less than honest” practices that put many millions of dollars of questionable loans. I know this, because I saw this practice in action!

The largest component of the economic period of growth of the last few years has been the housing market, and we are starting to see new homebuilding slowing down, resale home purchases starting to cool off and now a potential time bomb ticking in the mortgage market. I have seen figures that are indicating that foreclosure rates are steadily increasing in the country.

All of the above smacks of the S&L scandal error where the country’s financial system was screwed up by less that fiscally responsible practices that started an implosion in banking, real estate and consumer lending that translated to high inflation rates and high interest rates.

In the S&L crisis, peoples savings were channeled into the home lending market by S&L’s. This “daisy chaining” of money imploded because of graft, corruption, poor management practices and a cooling off off demand. Today, S&L’s have been replaced by Mortgage Conduit agreements between Wall Street Brokerage houses and originators of mortgage instruments. People’s savings are being used to underwrite mortgage loans worth many times the original invested amounts. IT IS ALMOST THE SAME SCENARIO SETTING UP AGAIN!

And all of us who are old enough to remember know who was left holding the bag when it was time to clean the mess…the U.S. taxpayer, that’s who!

The next financial hustle for the “smart money” will be in the clean up of the mess, when it happens. Can you say R.T.C.!

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