From the Baltimore Sun:
Subprime snake-oil salesmen promised a quick flip
Mom and apple pie may be next.
The answer is it seemed such a tried-and-true concept that it fell victim to the same unbridled optimism that fueled the 1990s technology boom: Invest in a sure thing before it is too late and don’t sweat the details.
“I’m telling you, it can’t miss,” a taxi driver in Northern Virginia said a couple of years ago, as he told me about the development where he’d bought a condominium under construction. He intended to sell it for a hefty profit immediately upon completion. “My buddy bought two.”
My guess is both of those flippers wound up long-term condo owners with honest-to-goodness mortgage payments that weren’t of the two-week variety.
The subprime mortgage market provides home loans to the least creditworthy borrowers, including those with troubled credit histories. Subprime is investment-speak for “loans you probably shouldn’t make, but what the heck.” Many of those loans have gone sour, which should be no surprise.
The extent of the subprime market had been talked about only in whispers and generalities. Lack of details from financial institutions has heightened the anxiety over its potential impact.
But the cat is out of the bag. That low-end market has whacked even high-end Wall Street.
…
Think back to real estate agents who urged clients to buy quickly. Think of aggressive lenders. Think of investment firms that snapped up mortgage portfolios.Think of the people who yearned for a home or profits from a quick flip and were led to believe that paying their financial dues was unnecessary.
Most of all, think of your own family and resolve never to let it fall prey to optimism manufactured by others.
Since we are now in the midst of a crisis which was caused by subprime mortgages, I wanted to share with you a new and innovative idea that may offer a solution to this crisis. Previously, I had submitted comments to the Federal Reserve Board regarding the Subprime Lending Crisis. I presented them at the FRB hearing on HOEPA on June 14 in Washington, DC where the current crisis was discussed.
I also will be giving a presentation to the Third Annual SUBPRIME ABS conference to be held in Las Vegas on Sept. 19-20, 2007. The Press release appears below.
IMN Announces Third Annual Subprime ABS: Where Are We Heading?
LET’S NOT REACT TO AN ACCIDENT, LET”S PREVENT ONE:
The key to the subprime crisis is the borrower, and no one has approached a solution from this direction. It seems that all we have been doing is watching helplessly while the subprime defaults and foreclosures threaten our economy with disaster.
This is a critical time. Everyone seems to be helplessly reacting to this crisis, whereas, we should be proactively involved in trying to lessen the impact of default and foreclosures by helping the borrower monitor his/her financial health. This way, the borrower will be guided to “stay-on-track” and avoid financial harm. A by-product will also be an improved credit score for the borrower. This is a win-win situation for all involved.
By way of introduction, I have been involved with research in the subprime crisis and its impact on the lending community. I attended the Federal Reserve Board hearing on HOEPA on June 14, 2007, and I submitted two comments which suggested a solution to this crisis. As an educator for the past 30 years as well as a practicing CPA and Consultant for 30 years as well, I have approached this issue from a unique perspective. I would like to suggest a “proactive” solution. Let’s not be “reactive”, let’s be “proactive”.
There is something that can be done, and it requires that we recognize the key player in this drama: THE BORROWER. The financial health and financial literacy of the borrower will have a major impact on the situation. I suggest a new and innovative approach using Artificial Intelligence to help monitor the financial health of the borrower and enable the borrower to be better able to payoff the mortgage and be prepared for “payment shock”.
It is not enough to consider the borrower’s income as the sole factor in determining qualification for the loan. There are other factors that should be considered such as spending patterns, other debt, credit card balances, and other variables that are unique to each borrower. This can be accomplished using AI as a tool to not only help the borrower qualify for the loan, but it can also be used during the most critical period, the years of paying-off the loan, to monitor the financial health of the borrower. My two comments to the Federal Reserve Board spell out my solution.
The key to any mortgage is having the capacity to payoff the loan, not just simply qualifying for the loan. What good is lending to the borrower, who is lacking in financial literacy, if he/she unknowingly will be making the wrong borrowing and spending decisions which will result in loan default? I believe that the subprime borrower will welcome this guidance because at this time, this borrower is helplessly failing in record numbers!
I believe that both the borrower and the lending community will benefit. This can be accomplished by providing the borrower with an impartial evaluation of the borrower’s ability to afford the loan and it will help monitor the borrower during the course of paying off the loan. The borrower will have greater confidence in the loan decision, and the lender will gain confidence in the borrower’s ability to qualify and repay the loan. This process will lower the probability of delinquency, default, and foreclosure. The analysis will also provide an opportunity for “due diligence” on the part of the lender. In effect, the lender will be able to rely upon this impartial analysis and fulfill the lender’s fiduciary responsibilities.
I welcome your contact on this issue.
Best Regards,
Samuel D. Bornstein, CPA, MBA, BME
Professor of Accounting & Taxation
School of Business
Kean University, Union, NJ
Bornstein & Song, CPAs
Certified Public Accountants & Consultants
P.O. Box 627
Oakhurst, NJ 07755-0627
Tel: (732) 493 – 3399
(732) 493 – 4799
Cell: (908) 433 – 6744
Email: bornsteinsong@aol.com
Maybe you can install a chip in their heads.
KL
Re: Samuel Bornstein.
Another liberal professor telling preaching rellacation of wealth. Why in god’s name should I have to pay off someone’s mortgage or home equity, which they probably used to pay off their credit cards, buy a fancy new Escalade, or a nice trip to the Europe?
What ever happened to RESPONSIBILITY? I rent right now and didn’t make the same gamble as some of the people in trouble. Why should I have to pay?
Get real, professor and keep teaching your liveral views.
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