March 5, 2007: Sub-prime is not divine, a trip down memory lane

I suspect that the markets may continue to drift downwards today. Regarding the sub-prime hysteria, we have been there and done that before. A banker friend graciously e-mailed me several articles from the "SUB-PRIME COLLAPSE OF 2002". We have shot memories. And the large financial institutions and hedge funds have even shorter - or selective - memories on this topic. Not surprisingly, Goldman-Sachs, Merrill Lynch and other large diversified financial behemoths are in the thick of the mess. As I wrote on February 23rd and several times before, we are in a mess. But the mess is solvable as the final victims of the sub-prime Ponzi scheme purge their bad loans, take a hit on their share price and move on.

This is NOT a collapse, IMO. This is another example of not lending to individuals who cannot, or will not pay. The juiced interest on these loans are not worth it.Let them earn a secured credit card and learn life's lessons about responsible financial management. A mortgage? Forget about it. Rent.

"The days of getting credit...with poor credit or no credit history are numbered. The so-called "sub-prime" credit ....market which has never been in tested in a recession, has deteriorated at such a rapid pace over the past year it has caught regulators and issuers by surprise.

"Sub-prime" usually refers to consumers with credit scores below 560. "Sub-prime " includes consumers with little or no credit history, consumers who may have filed bankruptcy within the past ten years, those who have a terrible track record over the past seven years of paying their bills on-time, or consumers currently carrying way too much debt for their income level.

The credit industry began to target this group of consumers during the early 1990s ...(with high rates)...However, the new breed of "sub-prime" credit cards required little, if any, security deposit.

When the economy went sour last summer, "sub-prime" holders began to stop paying their...bills. Presumably many of the consumers were faced with reduced income......Some of the issuers of sub-prime debt were writing off losses in the 15-17% range versus the industry loss rate of 6.5%.

As a result....issuers have been burned badly. "Sub-prime" lending lead to the shut down of NextCard and the unravelling of Providian.......This month The credit Store announced it was in big trouble and may have to close operations.....

The collapse of the "sub-prime" ....market has made government regulators increasingly concerned over the risky business practices of these issuers. This month, the Federal Financial Institutions Examination Council, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision developed account management and loss allowance for ....lending. The draft guidance would apply to all institutions under the agencies supervision that offer credit....programs.

Most of the issuers involved in sub-prime credit...have pulled back their marketing. Consumers with no credit or credit problems will have to get ....(credit)...the old fashioned way."

SOURCE: CardTrak: "LOUSY CREDIT-FORGETABBOUTIT!" ---AUGUST 2002

This article focused on credit over and above mortgages.