re: Subprime industry's woes
Interesting article, puts the current woes of some of the subprime lending originators into perspective
'The subprime-mortgage market is big, but it's not big enough to push the U.S. economy into a recession by causing a credit crunch.'
— Robert Froehlich, DWS Scudder
marketwatch.com
Subprime concerns overblown, fund manager says
Shakeout will be 'most hyped disaster that never occurred since Y2K'
By Alistair Barr, MarketWatch
Last Update: 6:32 PM ET Mar 12, 2007
SAN FRANCISCO (MarketWatch) -- The shakeout in the subprime-mortgage business won't escalate into a disaster capable of undermining the U.S. housing market and the economy, the chief investment strategist at fund-management firm DWS Scudder said Monday.
Subprime mortgages are offered to home buyers with spotty credit reports, lower income and higher debt. The sector has descended into crisis in recent weeks, as rising interest rates and a stagnant housing market leave more borrowers struggling to meet monthly payments.
Such loan problems have begun to worry more investors. They're concerned that the mini-credit crunch could spread to other lenders, crimping the availability of credit in the broader housing market, pressuring home prices and even slowing the whole economy.
The subprime sector is too small to have such a big impact, according to Robert Froehlich, who is chairman of the investor-strategy committee at DWS Scudder, a division of Deutsche Bank AG
"For all this to occur, the subprime-mortgage collapse has to be big enough and important enough to set the wheels in motion. And the fact is that it isn't," he wrote in a market commentary Monday. "It will be the most hyped disaster that never occurred since Y2K."
Y2K was the term encompassing concerns about how computers and other electronic devices would handle the change from 1999 to 2000. The new millennium arrived with few problems, but a lot of money was spent ahead of time to prevent a catastrophe that some now argue may never have happened.
Froehlich said Monday that, like Y2K, investors are worrying too much about a subprime-fueled disaster that probably won't happen.
"The subprime-mortgage market is big, but it's not big enough to push the U.S. economy into a recession by causing a credit crunch," he added.
During the peak of the industry's growth in 2004 and 2005, about 3.2 million homes were purchased with a subprime loan, Froehlich estimated. That's about 2.8% of total U.S. households, he wrote.
If 30% of those subprime homeowners fail to make their payments, fewer than 1 million households would be "out of luck and out on the street," Froehlich projected.
There are roughly 114 million homes in the United States, so that means more than 99% of households are either making their mortgage payments or managing to pay rent. "These numbers suggest that most U.S. consumers are unaffected by the subprime debacle," he concluded.
Alistair Barr is a reporter for MarketWatch in San Francisco. |
