Sunday, August 19, 2007

Why Concern About Subprime Loans is Overblown

According to the Mortgage Bankers Association (MBA), there are about 75 million homeowners in the U.S., and about 1/3 (or 25 million) own their homes free and clear of any mortgage and 2/3 (about 50 million) have some kind of mortgage (see chart above, click to enlarge).

Of the 50 million homeowners who do have mortgages, three-quarters have fixed rate loans (37.5 million). Only one quarter of these borrowers (12.4 million), or about a sixth of all homeowners, have adjustable rate mortgages (ARMs).

Among current homeowners with mortgages, 4.9% (2.45 million) are subprime borrowers with adjustable rate mortgages. Of these 2.45 million homeowners with subprime ARMs, 10.13% (or 248,000) are seriously delinquent or in foreclosure (see chart above).

According to the MBA: "Considering historic rates of foreclosure, these statistics, while important, are not out of line with rates in the past and do not alone characterize a macroeconomic event for the U.S. economy."

Further as the chart below (click to enlarge) from the MBA for delinquency rates (not foreclosures) from 1998-2007 indicates, the subprime delinquency rate (top blue line) has been rising recently, but overall delinquency rates have been fairly constant.

Bottom Line: Considering that: a) most loans are fixed-rate, b) more than 1/3 of American homeowners don't even have a mortgage, c) the overall subprime market is such a small fraction of the overall mortgage market and the riskiest subprime ARMs are even a smaller fraction, I agree with the MBA, I don't see how troubles in the subprime market can bring the economy down, or start a recession, or be considered a "macroeconomic event."


At 8/19/2007 2:14 PM, Anonymous Anonymous said...

I agree that the "subprime shock" is a symptom of a problem - the overall bursting of the housing price bubble, rather than a cause of economic trouble itself.

Those people with ARMs will find it harder to refinance, thus reducing the income they could spend on other things, plus there will be a "wealth effect" reduction because of sagging real estate prices.


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