Wednesday, July 18, 2007

In actuality, there is no difference in Prime & SubPrime

On Wall St: Subprime loans go to the neighbours of the Joneses

What of the optimistic (but young) investment banker who takes out 6 times his best year's salary and bonus to buy a £2m pad. He has little hope of ever paying that back - especially after his MEWing options evaporate. 7 years payments then bankruptcy and homelessness. Is he prime? Or subprime?

Posted by lvmreader @ 08:23 PM (599 views)
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5 thoughts on “In actuality, there is no difference in Prime & SubPrime

  • Regrettably a large swathe of mortgage payers here are over optimistic as well as completely oblivious to the financial tsunami heading in their direction. How many of them have sat down and worked out how much extra they will be paying on their mortgage later this year and next after their fixed rate deals end? 4% fixed to 8% variable(and the rest by December), you don’t have to be a genius to work out what’s in store for you. The calculations on an average mortgage are frighteneing to put it mildly taking into account the wider economic implications. As for Buy to Let, oh dear oh dear didn’t the suckers ever study history or economics at school.

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  • japanese uncle says:

    The size of the bad debt represented by the sub-prime borrowers can be exploded once the spiral starts, ie, collapse of the housing bubble, leading to a recession, generating hundreds of thousands of jobless population who would be quickly joining the sub-primers like the living deads, without any affordability, thus spending for just bare necessity, wreaking havoc among the retail sector, generating another hundreds of thousands of unemployed in the retail business, generating another breed of the sub-primers, etc, etc. This is so obvious.

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  • Purely Keynsian reverse multiplier , JU and hence Gordon Brown will have to keep spending – looks like my bio rythm consultant at the local authority won’t be made redundant after all.

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  • This is subscription only. Not so good for public debate.

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  • The once-arcane world of US subprime mortgages has become notorious.

    Late payments and defaults by overstretched home owners have rippled across global financial markets.

    Hedge funds managed by Bear Stearns and others that had invested heavily in subprime related securities have suffered losses – very publicly.

    The problems have raised questions over complex structured financial products that are used not only for mortgages but also across global debt markets.

    Lenders to big corporate buy-outs have pulled in their horns, partly worried that subprime problems could be contagious. And even this week’s ousting of Peter Wuffli, UBS chief executive, could have something to do with the collapse of the bank’s internal hedge fund on bad subprime bets.

    All that can easily divert attention from the borrowers causing all the trouble. But they matter – not only as individuals but also because a careful analysis of their circumstances can help predict the fallout for financial markets.

    It turns out there is no such thing as a typical subprime borrower. The standard picture of a struggling low-income home buyer with a patchy credit history in an economically troubled neighbourhood only goes so far.

    That image does reflect the roots of subprime lending as a business that served out-of-pocket borrowers in troubled areas with “hard money” or heavily secured loans. But subprime lending has grown in the past decade on the back of targeting a much broader group with so-called “affordability products”.

    Even the famous Beverly Hills “90210” zip code, with all its celebrity residents, has 420 subprime home loans outstanding. Here, it seems, subprime home loans were a way to keep up with the Joneses rather than just a way to put a roof over one’s head.

    This underlines how subprime mortgages have helped borrowers stretch to buy homes in overheated property markets. They were particularly in demand in some of the fastest- growing areas of the US, not the most disadvantaged.

    Recent research from Deutsche Bank shows that, since 2000, areas with high home price appreciation saw the biggest usage of subprime mortgages.

    Five of the top 10 metropolitan areas with the most subprime loans are in California, with the remainder in other hot housing markets such as Phoenix, Arizona and Las Vegas, Nevada. Together, these areas account for more than a third of the risky subprime and similar mortgage markets.

    Douglas Duncan, chief economist at the Mortgage Bankers’ Association, says that, as a result, the subprime saga of delinquencies and defaults is really a story of seven states.

    Three of these – Ohio, Michigan and Indiana – are the subprime heartland where borrowers tended to fit the traditional profile. These areas are now suffering from steep declines in manufacturing activity, employment and population, all of which have been disastrous for house prices and subprime home loan performance.

    The states are also home to metropolitan areas that contribute some of the highest delinquency rates, such as Detroit, Michigan and Cleveland, Ohio. Detroit has become the poster-child for all that was wrong with the subprime lending business in recent years. But given that only 6.45 per cent of the region’s mortgages are subprime loans – considerably lower than the national average of 14 per cent – this focus is perhaps unwarranted.

    The remaining four states in Mr Duncan’s analysis – California, Nevada, Florida and Arizona – have much higher levels of subprime exposure and are likely to contribute to more problems in the coming months.

    Take Riverside, a district of California with 38 per cent of mortgages in the subprime category and a further 33 per cent in only slightly less risky Alt-A mortgages. Total home sales in Riverside dropped precipitously last year – down more than 20 per cent from 2005. House prices have held up but are projected to fall between 9 per cent and 14 per cent over the next two years. Meanwhile, house prices in other parts of California, such as San Diego, are already declining.

    With mortgage products heavily skewed to subprime in these areas, sunny California, rather than rusty Motown, is likely to see more subprime trouble in the coming years.

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