Subprime Answers

As a principal in Chrysalis Capital Partners, a private equity fund, Halpern and partner Greg Segall invest in distressed and troubled companies.

With the shakeout in the subprime market — companies failing or in need of capital or other assistance — times should be good for the firm.

But for now, Philadelphia-based Chrysalis is sitting on the sidelines.

“The market is changing in so many ways I’m not sure where the profitability play is,” Halpern acknowledged in an interview with MortgageDaily.com.

But Halpern is watching, and from his perch as an “expert” in corporate finance and bankruptcy, he has some thoughts on how the subprime market fell onto hard times and how it will return to profitability.

Halpern said the No. 1 reason for the market’s woes is how subprime originators continued to pursue volume even when those loans were making little or not money.

“That was puzzling to me,” he said. “It surprised me watching the market that none of the major players were willing to sacrifice market share in defense of profitability.”

Halpern said if originators had tightened up lending criteria or slightly increased interest rates when problems first arose “they might have originated fewer loans, but they wouldn’t be losing money every time they did so.”

“If you’re creating product cost in excess of what you are paying for it, if you are losing money on every unit, it’s hard to make that up by increasing volume,” he said. “It fell to the point where profit margin of the originators was erased from zero to negative.”

As competition heated up and originators sought to make more loans to increase volume they began loosening credit standards, which led to even fewer profits, Halpern said.

The market, however, will return to profitability and subprime loans will continue to play a valuable and necessary role in the American home buying market.

“Subprime lending does provide greater flexibility for more people to acquire houses,” Halpern said. “And that is a good thing. It’s good for financial institutions and there are a lot of creative entrepreneurs out there, a lot of people who have done good things in this market.

“Ultimately, however, it boils down to the credit decision,” he said. “Financial engineering can only reallocate that risk. You can make the risk cheaper, but it will still be there. People will not be able to get loans that can’t be made profitable.”

Halpern said the fallout in the market, while severe, is still part of a normal cycle in the mortgage business.

“Over investment is a normal part of the process,” he said. “You figure out where the limits are, and then you get a correction.”

Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: PatCrowley@MortgageDaily.com