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Sub-prime mortgage market -Some facts and data

The sub-prime mortgage market

The sub-prime market is the part of the mortgage market devoted to borrowers with a less than perfect or bad credit record.

According to the latest MBA (Mortgage Bankers Association) figures the sub-prime sector makes up13.7% of the total mortgage market.

Sub-prime borrowers face higher costs due to their lower credit standards and higher risk of delinquency.

The sub-prime market covers the same spectre of available loan types as the prime market: adjustable rate mortgages (ARM), fixed rate mortgages (FRM) etc.

Contents

• The structure of the US mortgage market
• Sub-prime as a share of total mortgages.
• Sub-prime delinquencies
• Sub-prime foreclosures
• Prime delinquencies
• Prime foreclosures
• Delinquencies and foreclosures -all mortgage loans
• Tighter mortgage credit standards
• No signs of distress in broad credit measures.
• Consumer balance sheets remain healthy

What are the concerns?

• A bust in the sub-prime market impacting the financial sector negatively
• Households with loans in the sub-prime market cutting back consumption due to credit distress
• Prime lending standards tightening and feeding negatively into a broad consumer slowdown
• Is this the first sign of liquidity drying out?

Our take on the macroeconomic impacts #1

• No doubt that the problems in the sub-prime market are serious.
• The sub-prime jitters could be an early warning of more widespread trouble in the credit market, with negative macroeconomic consequences.
• While signs of such developments should be watched closely, we expect the problems to remain contained within the sub-prime sector.
• At present there are no signs of distress in neither the prime mortgage market or other segments of the consumer credit markets.

Our take on the macroeconomic impacts #2

• With the economy remaining sound outside the housing market (i.e. healthy household and corporate balance sheets, continued job growth and high income growth) the conditions for a credit crunch are not present.
• Moreover, we do not expect a major outright drop in house prices. That said, mortgage credit standards are likely to be tightened further going forward.
• However, given the present situation we do not expect aggregate consumer spending to enjoy any major spill-over from the crisis in the sub-prime mortgage sector.
• As a whole we expect no large ramifications on the macro economy from the sub-prime crisis.