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December 03, 2007 06:42 PM UTC

Financial Follies Chapter 3

  • 4 Comments
  • by: JO

Ah, the subprime mortgage mess! Unqualified borrowers turned deadbeats. EXCEPT that…

From Atrios:

An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.

In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half — 55% — of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm’s analysis found.

Comments

4 thoughts on “Financial Follies Chapter 3

  1. If more than 50% of subprime borrowers can afford higher monthly payments, that means 45% can’t. The question then becomes, what percent can afford to continue paying the teaser rates and need the rate freeze?

    And what percent can’t afford the current teaser rates and should be allowed to default?

    1. I think you’re actually lowballing the numbers.  55% of the loans went to people who could have actually gotten fixed rate loans or ARMs at a lower rate than they got.  This means that they’re the MINIMUM number of people who could likely afford to keep paying.  There are also a number of people who got subprime loans who have a lousy credit history but have enough money coming in to pay the initial rate if not the current rates.

      Then there are those who should never have gotten the loans in the first place, and those whose circumstances have changed since their initial loan application.  This is the group of people that are going to be subject to the results of a cost-benefit analysis; do their defaults hurt the industry significantly enough to warrant further intervention, or do they fall within “tolerable” limits (socially, politically and financially)?  They are the people most in need of help, but they’re the least likely to get that help.

  2. …of the so-called subprime mess, take a look at Paul Krugman’s column in the Times today. Short-version: economy faces a liquidity crisis that could cause havoc (meaning: a severe recession) far, far beyond housing.

    1. I think stocks could easily go sharply lower, and I think municipalities may find the credit markets will be closed or a lot more expensive than they’ve been relative to other credit markets. This could deepen a recession.

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