Impact of Sub-Prime: Part I

The Post has had a very interesting series of articles this week about the sub-prime mortgage market, which was the impetus for market drops across the world in the last few weeks. So how bad will it get? It’s a question I often get.
What is a sub-prime loan? Basically it’s a loan offered to a borrower who has been turned away bya traditional lender because of credit problems or other factors. Loans in this category often have a higher-than-normal interest rate. In the housing run up of the last 5-6 years, this type of loan was the only way many peopld could get into a house, and the fear is now those borrowers are defaulting and may be foreclosed upon.
The Post article notes that the problems so far have been concentrated in areas reeling from layoffs (remember the post about the job markets and it being a great leading indicator of the housing market?) such as Michigan, Indiana, Ohio, and the Gulf coast.

The Northeast, Southeast, and Midwest have a moderate 4-6% subprime loans in foreclosure as of Q4 2006. VA/DC/MD, Florida, and the West coast all have the lowest: 1-3% versus the US average of 4.5%. As the Post notes: “There is scant evidence-so far-that the mortgage problems are causing wider economic damage.”
Of course that’s not to say the problem can’t be here next, but it’s not here yet.


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