Subprime Lending – The “Best” Way to Make Money in the Housing Bubble

“Mortgage Crisis Spirals, and Casualties Mount”, says the New York Times.

“Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

“Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure. Many investors are also likely to suffer: Wall Street firms made billions in fees, commissions and trading revenue from packaging and selling subprime mortgages to them as bonds.”

And now the feds are on the case. New Century Financial (NYSE: NEW) – a large California-based subprime lending corporation – is being investigated by securities regulators and federal prosecutors. The G-men saw what happened to Eliot Spitzer’s career when he took on a few high-profile corruption cases. The next thing you knew, the man was on Oprah and living in the governor’s mansion. They’re not going to miss this chance.

Besides, who’s going to stand up for subprime lendering? The three founders of New Century sold shares in 2004, 2005 and 2006 – realizing more than $40 million in profits, according to the Times. Even as late as November of 2006, they were unloading the shares – more than $20 million between August and November alone. They got millions more in dividends, salaries, bonuses and perks. We don’t know how much they started with, but recently they were down to just 7% ownership of the firm.

They were getting when the getting was good. At the end of 2004, New Century stock sold for $66. In 2006, you’d still have had to pay more than $40 per share. But if investors liked the stock last year they should be delighted now. Last week, $40 would have bought them nearly four times as many shares.

The best way to make money in the dotcom boom was, of course, not by buying dotcom shares…but by selling them to the public. Likewise, the best way to make money in the housing boom was not by buying a house…or even by buying the shares of a mortgage lender. You would have done much better to start a subprime lending business yourself and sell the shares to the public. The secret was to get out fast…before the market crashed…and before the feds came after you.

(There is something about being a member of the public…a card-carrying member of the lumpen masses…a good citizen…a voter…that seems to doom a man to a life of failure. We are working on some thoughts…)

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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3 Comments on "Subprime Lending – The “Best” Way to Make Money in the Housing Bubble"

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The beauty of it all is that the top management at the subprime firms that recently went belly up are probably enjoying exotic drinks on a tropical island somewhere. And the Wall Street investment banks that played middle men in the whole scam get to keep the MBS packaging fees. The bagholders would appear to be the borrowers, but now Whitehouse hopeful Democrats Dodd, Clinton and Obama are riding to the rescue with proposals to help “save our homes.” Where is the downside for members of the U.S. real estate industrial complex? It’s all good…

“(There is something about being a member of the public…a card-carrying member of the lumpen masses…a good citizen…a voter…that seems to doom a man to a life of failure. We are working on some thoughts…)” Maybe it has always been this way in the good ole U.S.A. But I think it is more this way now than ever before. Our politicians are dooming our future by destroying the incentives for being the kind of citizen that made our country a politically stable entity. They are burning the legs of the chairs we all sit on to heat the room.

I don’t think it matters if you are a minority in this subprime lending time of reflection. I dislike seeing the words poor and minority used as if they can not be separated. Subprime lending does happen to minorities surely, but it also happens to caucasian individuals as well. I think the determining factors are your economic and educational levels of the individuals invlolved. Consumers who have good credit economically are “middle class” and educated but taggeg a minority are not the bulk of the subprime market.

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