Lax lending standards were one of the prime causes of the Subprime debacle. One of the terms you most likely have heard is that many real estate buyers qualified based on “stated income.” What that means is that you can write down your income based on what you need it to be to qualify and not what it actually is—without verification. Where I come from, we call that fraud.
I was reminded of that when I read Bill Fleckenstein’s article “Home-loan house of cards ready to fall,” in which he mentions some examples of what borrowers went through to qualify for a home loan. Those efforts ranged from the above “stated income” to physically copying and pasting bank statements to elevate homeownership-at-all-costs to a new level. The unknown here is how widespread this practice was during the lending heydays; although my guess is that it was the rule and not the exception.
I agree with Bill’s assessment that the Subprime mess will pass through various stages with the damage lasting for years. The interesting part of his story is that he posted it on 1/15/07, some eleven months ago!
His observations are right on, and I especially agree with his thought to “not take your eye of Subprime for a second,” which is why I have harped on it for most of this year. It will change the investment landscape for years to come and, being aware of these potential problems is the first step to preserving your portfolio when the markets finally realize the true implications.