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Lending Tree

Betting on bad mortgages

Bob Ivry writes for Bloomberg:

From 2001 to 2006, as U.S. home prices rose 50 percent nationally, owning the debt and guessing that borrowers would keep current paid off. Since July 2006, however, when housing supply began to outstrip demand and the number of late payments started to rise, the short position, or wagering against the performance of mortgages, has prevailed. Many of those responsible for the economic upheaval caused by subprime derivatives have also been its victims. Inadequate lending standards permeated residential and commercial real estate and corporate credit, said David Einhorn, co-founder of Greenlight Capital LLC in New York and a former director of New Century Financial Corp., the second-biggest subprime lender in 2006. In comments at an investors conference in October, he criticized loan standards in areas besides subprime, including the lending in two Manhattan commercial real estate deals. "These are loans based on the borrowers' ability to refinance rather than the borrowers' ability to repay," Einhorn said. If the borrowers defaulted when adjustable-rate mortgages reset, the mortgage sales people still got their commissions. Now many of them are jobless and broke.