The book I’m referring to might be a little dated at this point. The copyright for the book was 2008 and the author, Richard Bitner, appeared on The Daily Show on July 21, 2008.

But that doesn’t matter; the book is called Confessions of a subprime lender : an insider’s tale of greed, fraud, and ignorance and it is a fantastic look at what was going on in the subprime mortgage industry before “subprime” took its place as a four-letter word in the national lexicon.

Bitner was one of those people who handed out mortgages to people who had less than perfect credit. In 2000, he started a firm with two other men to help fill a very lucritive gap in the money business. They started a firm called Kellner Mortgage Investments in Texas and began a near-decade business that eventually went belly-up with the rest of the subprime industry.

Bitner explains how his company dealt with the borrowers, the actual people seeking mortgages, by working through brokers/loan officers/cheats/etc.

I can’t think of another industry where the vendor-client relationship has such a high degree of distrust. If almost three-fourths of all potential transactions are somehow fradulent, unreliable or misleading, it means the business model is fundamentally flawed.

The harsh reality if brokering subprime mortgages is that many loan officers are more concerned with their own paycheck than with the best interests of the borrower.

But then, what do you do with this mortgage that’s just going to sit around for 30 years?

In America, you turn it in to a commodity and sell the hell out of it.

That’s exactly what happened in this industry. It securitized and packaged into a product that would be sold as an investment (don’t ask me how, @mmagnolia22 saw my eyes glaze over a few times as Bitner got in to the flow of money and advanced, to me, economics).

But it’s not just the groups of borrowers, brokers, lenders, investment companies and ratings companies who should be blamed. Part of the problem came from appraisers. All of the properties had to be appraised, and ofter the appraiser was hired by a broker and “asked” to inflate the price of a property, thus increasing the broker’s commission when the deal closed. The only problem was that by artifically increasing property values of one home, when another appraiser would look at comparables for another home, they would raise its value because of the comp. WTH? So property values kept skyrocketing as bad appraisals by bad appraisers led to bad appraisals by good appraisers.

The rate of property appreciation experienced on a national basis over the last seven years was nit only a function of market demands but was due, in part, to the subprime industry’s acceptance of overvalued appraisals, coupled with a high percentage of credit-challenged borrowers who financed with no money down.

It’s all very technical and confusing, but an absolutely fascinating read. The thing that people have to keep in mind about subprime mortgages and mortgages in general is that it’s all risk management. Based on what you know about the borrower’s history, will they pay their mortgage on time? Unfortunately, somewhere along the lines greed got the better of a lot of people and now we’re in a serious crisis.

Oh, but there’s more bad news ahead, you say?

Yup.

Later in the book, Bitner talked at great length about all of the subprime Adjustable Rate Mortgage (ARMs) that would be coming up for readjustment in the near future. Well, that future came and went, and it’s what we witnessed as the housing bubble burst and people were being evicted from their the bank’s homes. But there is another daunting problem out there that hasn’t been discussed in the MSM or many blogs, pay-option ARMs. These types of mortgages were commonly used in Florida and California (the latter I’m positive he mentioned, don’t quote me on the former). A majority of those mortgages are going to be due for their adjustments, as the name implies, in 2011. Meaning, people who had no money down on a home and have been paying ridiculously low rates are going to find themselves in dire straits as they try to make ends meet while staying in their house.

Another round of bubble-bursting is coming. Brace yourselves.

Although Wall Street is skilled at making money, risk management has never been an area of expertise. This point can’t be stressed enough: The current mortgage debacle is a direct result of Wall Street’s inability to manage risk. In fact, companies like Merrill Lynch had no effective risk management processes in place until shortly before the subprime implosion. Since the focus was in feeding the securitization machine and driving profits, no one was paying attention to the basic fundamental principles of risk management.

All-in-all, it was a great and (pretty) easy read. Just under 200 pages; I finished it in over the course of a few reading sessions on a Saturday.

• Richard Bitner’s blog: Lending Sanity
• Review from The Big Picture
• Review from Letters On Pages