Is The Subprime Sector Affecting The Mortgage Market?

It seems you can’t read a newspaper or watch the TV news without coming across yet another piece about the subprime lending situation. The media has latched onto this story and have created a lot of buzz about it. It’s worth spending a bit of time to look at the subprime sector in more detail.

The vast majority of homeowners with mortgages are still making their repayments and their consumer spending is massive when compared to that of subprime borrowers. Subprime mortgages made up only 13.7% of outstanding mortgage debt in Q4 2006 and their default rate was 13.3%. So, although they have been high profile casualties, notably, New Century Financial, subprime lending accounts for a relatively small part of the whole mortgage market.

The subprime mortgage market now is “little more than an asterisk in the overall U.S. credit economy,” said Roth Capital Partners’ Donald Straszheim.

“It’s the latest episode of housing hysteria,” said Sean Snaith of the University of Central Florida’s Institute for Economic Competitiveness. There is no denying the fact that millions of homeowners are facing mounting pressure to make their repayments and many are faced with the horrible prospect of foreclosure.

The government is facing increased calls to come to the aid of these people. A week after a coalition of civil rights groups called for a six-month halt to home loan foreclosures on subprime borrowers, U.S. Senate Democrats called for the government to bail out troubled bad credit mortgage loan holders.

Foreclosure is absolutely the last resort for lenders. The housing market is still sluggish and inventory levels are high so lenders don’t really want to be saddled with properties which may be difficult to sell and for them to recoup any losses. It is in the lender’s interest to find a way to restructure existing loans so that the homeowner can keep their homes and repay the mortgage in the long term.

“It’s in everybody’s interest, both the borrower and the lender, to find a way to avoid foreclosure,” said Dana Johnson, Comerica Bank economist. The best solution for homeowners who are faced with increasing mortgage repayments is to look at mortgage refinancing.

Refinancing could reduce monthly payments and these kinds of mortgages represent a small proportion of the $9 trillion US mortgage market. “If we’re talking about the subprime industry I think there is a compelling and distressing story to be told,” said Richard DeKaser, an economist with financial holding company National City Bank. “But if we’re talking about the housing market or the U.S. economy as a whole, I think its role has been over-amplified.” So, although there is no doubt that the current shake-up in the subprime sector is causing misery for many homeowners, it has to be taken into context with the whole mortgage market, which is still looking healthy.

There are a lot of positives in the mortgage market as a whole and rates are still low and mortgages are still affordable.