Sub-Prime Debacle

This article here talks about how Washington Mutual and Merrill Lynch are now feeling the pinch from the sub-prime loans made that are now going bad, and that they are writing off billions of dollars in bad loans. This has caused a 75% drop in profits this quarter.

This sub-prime loan debacle really doesn't help anybody. Consumers suddenly thought 'hey I can get a cheap loan' and instead of just refinancing or getting something affordable, they stretched their credit score to the max to get a bigger house. Well, the honeymoon is over, and the debts are coming due, especially the ARM loans.

So who is to blame, the consumers or the suppliers of these loans? Consumers are going to be naturally selfish and want a bigger house, and suppliers are going to be naturally selfish and want to make more loans (more commissions). Now we have people trading home ownership for bankruptcy and companies trading profits for losses. Where is the winner in this game?


Timothy said...

The way I see it, there will be two winners:
1- Investors who are looking for a deal in the forclosure market.
2- Banks who didn't get into the subprime mess (like Zions Bank, okay I'm a little partial); who are set to help the large amount of people who are looking to refinance into 30 year fixed rate loans from their Option ARM loans.

It is survival of the fittest and in this market, that means the most financially fit.

Dr. Tufte said...

I don't think we should lose sight of one aspect of how we got into this mess.

For about 2 decades we've been pushing "democratization" of credit: the idea that credit should be more widely accessible than it has been in the past.

On the whole, that has been a good thing. If we focus on one bad aspect of the situation, we are likely to miss the big picture.