Future of Subprime

The following is a guest post from Peter Samuel Cugno, Chairman & CEO at Secret! University.

I frequently read a handful of industry discussion boards, and post on some of them from time to time, as some of you know. I see this particular question being asked and discussed often, so I thought I would take a stab at it this morning for you.

Based upon what I read, the conventional wisdom seems to be that it will ‘come back’ (like it was the last several years) and that it will probably take a dozen years or so to do that. That ‘conventional wisdom’ I speak about, looks like it’s coming from people who joined our industry during the last industry cycle Aug ‘98 to late Dec ‘05, so in my view they lack a clear picture in the broader context of the business.

I want to give you some of it’s history, so you’ll have a well-rounded view of the horizon. Subprime, formerly called B/C paper and/or ‘non-conforming,’ began in 1914 (with my initial industry employer and others). As an eye-witness, I know it was a around in 1966 when I started as a twenty-something LO. Fannie Mae and her snot-nosed step half-brother Freddie Mac (labeled ‘conforming’) began in 1972 and BTW, I went to their baby showers, etc. and drank a lot of beer!

Since then, Fannie (FNMA) & Freddie (FHLMC) - let’s call them by the initials they like to use these days “GSE’s” - during their history have stumbled badly a couple of times and ONLY because they are Government Sponsored Enterprises, they haven’t exploded all over everybody like ‘non-conforming’ has a couple of times (but been real close).

The way in which ‘non-conforming’ was done - ‘originate to distribute’ - during the last 20 years (not before that), and especially the reckless way it was handled the last decade, is at the core of what it’s going through, and what you all have seen recently.

The last full year of originations before the Aug.’98 to Dec.’05 cycle when rates plunged and home values soared to the heavens, give us a production volume of $65.693 Billion for Subprime’s 1998 annual total. While the 2007 annual total for Subprime was nearly three (3) times that at $181.289 Billion, and as has been reported just 2 weeks ago on the front page of the NMN, “B&C Vanishes as Volumes Fall to 7-Year Low.”

News reports from December ‘03, were reporting that a Mortgage Broker shift to Subprime had started, ‘conforming’ was off by 1/3. Therefore, for the 5 year period 1998 through 2003, mortgage brokers (60+% of the market) were concentrating on ‘conforming’ loans; then subprime took off like a rocketship, only to slide backwards significantly as we moved into the current industry correction.

I sware, I’m not trying to make your head explode. Actual number of individual loan transactions closed/funded in 1998 was 1,021,676 – 2007 it was 933,480. So, back in 1998 (we worked harder not smarter), we closed more individual transactions, and made a whole lot less money for our troubles!

It is my observation Subprime it will not be back like it was during the ‘98-’05 period (ever again), but IS back (if you thought it left) right now … only YOU don’t know who the players are, and who the big-shot players are going to be (nor do I) … because they are starting/building/growing/ developing, etc. right as we speak. It’s my sense going forward they will operate nearly as they did during the period immediately prior to the start of the last cycle in August ‘98 with annual production totals for the next several years (about 1/3 of today’s numbers), and similar to that period

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