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Friday, Oct. 24, 2014

Whose fault will be all those defaults?

Wednesday, April 4, 2007

I know little of the world of high finances but I do enjoy following the ups and downs of the stock market. Like many of you perhaps, I have a tiny amount of money in a retirement account and those limited funds come and go with the changes in the market. So when the market took it on the chin recently, I was not overjoyed.

The problem in the lofty world of high finance recently has centered around a group of subprime mortgage lenders who are losing their collective shirts. This week, New Century Financial filed for bankruptcy and others are expected to follow.

The problem for the subprime lenders is that many of their mortgages are going into default because the borrowers are unable to make the payments. But subprime loans are made only to those with a bad credit history.

So why should we be surprised when those with shaky credit histories have trouble paying their loans? They qualify for subprime loans only because they have had financial problems in the past. Are we supposed to be shocked that these borrowers still face difficult financial times?

This Wall Street brouhaha is very confusing. The experts act as if they are shocked that some of these loans are in default. What is so shocking? Wouldn't you assume that someone with bad credit might again find themselves in a pinch? Did they expect that simply because they loaned these consumers money that they would somehow magically change their circumstances and become perfect borrowers? Surely they can not be this dumb.

If someone with an impeccable credit history defaults on a loan, we should be shocked. But that is not the market of the subprime lenders. These loans start with a potential problem. When they collapse, we certainly should be sad but not alarmed.

Granted, surely there is more than meets the eye on this subject. When a company with billions of dollars in assets files for bankruptcy, there's something deeply wrong. But why should that not-so-shocking development negatively impact my few paltry retirement dollars?

Give the Democratic Congress enough time and the fault will not be directed at the borrowers who defaulted. Somehow we will be blamed for the poor financial management of others. Just keep your eye on this story and I'll bet I'm right.



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Michael Jensen
Michael Jensen