Subprime Mortgages

The TV Sitcom, “How I Met Your Mother” expertly laid out the Platinum Rule last week.  Too bad mortgage company execs didn’t see these around the year 2000.  Some of them may have been able to keep their jobs.

Barney, on the show, came up with the Platinum Rule of dating: Never LOVE thy neighbor because it never ends good.  He then stepped through the eight stages of such a relationship.  Funny thing…the platinum rule applies to subprime mortgages as well.

Step 1 – Attraction:  This is that first moment someone catches your eye.  “Hmm…subprime mortgages.  Sounds sexy.  Have to think about that.”

Step 2 – Bargaining:  Maybe we can make this work.  It seems to make sense.  Others are lending money to people with bad credit scores and getting away with it.

Step 3 – Submission:  All right, all right.  Other companies are killing with these subprime mortgages.  Let’s do it. 

Step 4 – Perks:  Oh Hell!  We’re rolling in reported earnings.  This is fun.  We give money to people who can’t manage their own finances.  Then they give us a note that says that they’ll promise to pay it back.  Then we sell that note to some other suckers and claim a profit. 

Step 5 – The Tipping Point:  Hmmm….interest rates are on the rise, home prices are declining.  These poor credit risks are paying off their debt on a variable interest rate.  This isn’t good…oh wait, more of them aren’t paying.  They’re getting behind.  Yikes.  (Nail biting ensues).

Step 6 – Pergatory:  Crap.  Blew this one.  Looks like we’re resigned taking some losses on these cranks.  Maybe I can sell this junk off to some other sucker.  We can tell everyone that we’ve done a good thing by getting people into houses – one – and getting them into houses that they otherwise couldn’t afford – two.

Step 7 – Confrontation:  Shareholders are pissed.  Hedge funds are coming after us.  Board is getting rid of me.  I’m toast.

Step 8 – Fallout:  Wow.  How did that happen?  I was on top of the world a couple years ago.  Now, I’m out of a job, damaged goods, didn’t even get an enormous golden parachute.  Me a Wall Street titan, a financial genius, bested by the people living paycheck to paycheck.  What went wrong?  Oh yeah.  Maybe I shouldn’t have been lending money to people who couldn’t pay it back. 

Go figure.  Lending money to people who can’t afford to pay it back isn’t such a good business proposition after all. 

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