Sunday, March 18, 2007

root causes and magnitude of subprime issues

Someone blame fraud, but less than 0.1% of mortgage application in 2006 were classified as frauds. Furthermore, FinCen found that only less than 1% of mortgage frauds SAR were characterized as subprime frauds. In conclusion, mortgage loan frauds is not a major contributor to recent subprime issues. It is a function of lax lending standards, rising short term rates, and declining home prices. lending standars was low uprfront. When time came for adjustable rates to inrease, many house owners could not afford it. Short term rate has increased from 1% to 5.25%. Desipte the recent seriousness, only 6% of outstanding mortgages are subprime mortgages with ARM, it is unlikely that a major financial shock will ensue. "Richard Brown, FDIC chief economist recently remarked that FDIC insured banks hold about $2.2 Trillion in mortgages, probably with 85% to 90% being prime mortgages. The total size of the mortgage market is about $10.2 Trillion. About $5.5 Trillion have been securitized. The total size of the Subprime mortgage market is about $1.3 Trillion. If 30% of such mortgages default, and banks are only able to recoup 60% of lent monies, that would result in losses of $156 Billion. It is estimated that FDIC insured banks generated about $145.7 Billion in profits in 2006 alone." "The Mortgage Bankers Association notes that 35% of homeowners own their homes outright while 47% have fixed-rate mortgages,” he writes. “Only 6% are subprime borrowers with adjustable-rate mortgages. " although is financial shock is unlikely, the increasing inventory will cause a slowdown in real estate sector. Such a sector slowdown will have a negative effect that will be aborbed by other sectors.

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