Subprime Lenders are in Trouble (and Rightfully So)

As expected, many subprime lenders have filed bankruptcy or closed operations during the first 45 days of 2007. Most of these lenders are having to buy back loans from the investors who purchased the loans. The main reason for the buybacks are first payment defaults.

In my opinion, we will continue to see a shakeout on the subprime side of this business. I don’t see this as anything other than a correction in the market. Lenders were providing 100% financing on loans that shouldn’t have been made.

The real estate market over the past 5 years was much like the dot com market of the late 1990’s when companies had huge market values without ever producing a profit. Lenders have been providing loans to borrowers with bad credit just hoping that home prices would continue rising at double digit rates. I believe Alan Greenspan referred to this type of thinking as “irrational exuberance”.

Hopefully this market correction will force the bad lenders out of the business and make the strong lenders even stronger. The stock market has bounced back from the correction of the late 1990’s and now investors require companies to make profits. Maybe the same will happen with the real estate market.

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