The subprime situation explained.

In the height of the building bubble, some lenders decided to take significant risk, giving loans to get people in houses more expensive than they could afford, or getting them houses when their credit was too poor to afford a home. Mortgages purchased under these conditions are called sub-prime mortgages.

Now a high percentage of loans given in this way are failing.

How did These loans work?

• They did this in some cases by getting them interest only loans, hoping the value of home would go up.
• They also did this by starting the interests rates low, and raising them higher over time.
• This was especially true in high-dollar home areas like the East and West coasts.

What Happened?

• When their home values began dropping, and with their interest-only loans began to cost more, many people who had subprime loans found themselves upside down in their homes.
• Many people did not see how they could come out ahead, and are walking away from their homes and mortgages, giving them to the bank, and leaving the mortgage companies holding the bag.

What is happening to the mortgage companies?

• Many of the mortgage companies that took on these risky subprime loans as a big part of their loan business are now failing.
• A part of the recovery of the construction industry is for the "shake out" of these risky lenders to happen, and it is happening on schedule.
• Therefore it is a hard but expected thing when we see that more than two dozen subprime lenders have gone out of business . There will likely be more in the next year.

What does this mean to Paradigm's Customers?

• When many loans go bad at one time, billions of dollars can be tied up for a year or so until the home can be sold again for its new reduced value.
• For builders who have many unsold homes, and land on which they have to pay taxes but can't build and sell houses The overall value of the company drops.
• This impacts their ability to borrow money, since they are not taking in enough money to pay their bills.
• This situation lasts until the unsold homes are sold, and the builder begins to get cash again to build new houses on their land.

What does this mean to Paradigm?

• Paradigm's Invoices are one of the bills our customers pay.
• In Johnny's' email today he wrote about how hard it has been for our customers to pay their bills. This is the reason.
• Most of our customers still use us, though they are building fewer houses. How much Paradigm earns from each customer is there less than before.
• Sometimes our customers, in an effort to cut costs, try to do inspections themselves.
• Many of these customers are counting on us to be ready to jump back in when they are building many houses again, because they would rather us do the work.
• When enforcement orders happen, a builder agrees to do specific, strict environmental steps, even if they can't afford it, so that they quit doing damage to the environment. They will have special need for our services, since they do often do not have the expertise to do the steps.

-In a nutshell, the failure of the subprime mortgage market impacts our customers and therefore our business.

-It impacts them because the money available to buy homes is tied up in defaulting home loans.

-Since it was a risky business practice to begin with, an important step of getting the industry back on its feet is to resolve these subprime loans, and reform the lending practices for the future.

-Most experts are predicting that this situation is hard, but will be history in the next 18 months.