Subprime home loans: don't panic

As serious as the mortgage situation is, there are good reasons why the sky is not likely to fall.

By Milton Ezrati

from the April 26, 2007 edition

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New York - Amid anxiety over subprime mortgages, perspective is sorely needed. There is no denying, of course, that subprime defaults and delinquencies carry risks that will hang over the economy and its financial markets until well into 2008. But there is also no denying that there is much in the situation to blunt the subprime impact. Serious as the mortgage situation is, probabilities still suggest that the sky will not fall.

The mortgage statistics are certainly striking. According to the Mortgage Bankers Association, delinquencies on mortgages of all types rose to 4.95 percent of outstanding mortgages during the fourth quarter of 2006, the latest period for which complete data is available. That rate is up from 4.67 percent in the third quarter and is the highest rate since the second quarter of 2003. Also during the fourth quarter of 2006, actual foreclosures on all mortgages rose to about 1 percent of all outstanding mortgages, an all-time high and up from about 0.9 percent during the previous quarter. In the naturally more vulnerable subprime area, delinquency rates climbed to 13.33 percent in that period, up from 12.56 percent in the previous quarter. Foreclosures in this area rose to 4.53 percent of such loans outstanding, up from 4.35 percent during the third quarter.

In the financial sphere, these reports have raised fears that the problems of mortgage lenders will spread to those institutions that lend to subprime lenders and to those individuals and institutions who own mortgage-backed bonds that include subprime exposure. Compounding these financial considerations are fears that foreclosures will depress the housing market even more than it is by adding to an already large inventory of unsold houses, which the National Association of Realtors estimates at already 4 million dwellings, up almost 20 percent from a year ago. Combined, these potential problems threaten to create a situation in which problems in finance and the housing market feed each other and drag down both areas in a kind of vicious cycle.

While it's tempting to amplify these understandable concerns, as so many did during last month's panic, investors can gain much from a look beyond the river of fearful adjectives and innuendo that has flowed so freely over this subject.

It might help, for instance, to note that few delinquent mortgages ever see foreclosure. According to the National Association of Realtors, a mortgage is delinquent if it is 30 days overdue. History shows that most of those whose payments are 30, 60, or even 90 days overdue will eventually pay up and never see foreclosure.

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