NEWS / Foreign Exchange

U.S: Subprime mortgage market - containment or contagion?

• Problems in the US subprime mortgage market have fuelled fears of a broader contagion to the housing market and the economy in general. We focus on three potential channels for a spillover from the subprime problems: a broad tightening of credit, rising foreclosure rates and the impact of Adjustable Rate Mortgage (ARM) resets.
• Mortgage credit standards have been tightened in recent quarters. And while we would not be surprised to see a further tightening of credit standards - also outside the housing market - during the coming quarters, the conditions for a broader credit meltdown are currently not present.
• Rising foreclosure rates will put more homes up for sale. This could potentially delay the stabilisation of the housing market. However, the additional number of homes for sale in 2007 will correspond to no more than one month??™s turnover. Hence, the overall impact on the housing market is not likely to be that great.
• The bulk of the ARM resets will occur during 2007 and 2008. However, the negative impact will be limited, as it will correspond to less than 0.25% of aggregate personal income growth. Moreover, the impact will hit less than 10% of US households.
• Finally, it might be constructive to view the subprime problems as a symptom rather than a cause. In the wake of 425bp of monetary tightening and a slowing housing market, it is understandable that some problems should show up in the riskiest section of the adjustable rate mortgage market.
• While the problems in the US subprime mortgage market are a risk factor, we do not expect any deep macroeconomic ramifications via either a severe tightening of credit or via housing activity. Containment is our call.