April 13, 2007

Sub-prime mortgage market woes seen as well contained

SAN FRANCISCO - US SUB-PRIME mortgage defaults have generated a lot of headlines, but the vast majority of home owners are repaying their loans and their consumer spending power dwarfs that of sub-prime borrowers.

Sub-prime mortgages to less creditworthy borrowers comprised only 13.7 per cent of outstanding United States mortgage debt in the fourth quarter of last year, and their delinquency rate was 13.3 per cent, according to the Mortgage Bankers Association.

The concern that rising defaults among sub-prime borrowers would spill over to lower consumer spending in the broader economy is unwarranted, said Mr Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness.

'It's the latest episode of housing hysteria,' he said.

'It's a small segment of the overall mortgage market and its problems are not akin to a currency crisis where there is some contagion that just ripples through an economy.'

By contrast, some argue that a systemic problem is in the making and government action is needed to bail out troubled sub-prime mortgage holders.

Such intervention may not be necessary though.

With demand for homes sluggish and so much property already for sale, it is doubtful that lenders are in a hurry to foreclose.

'It's in everybody's interest, both the borrower and the lender, to find a way to avoid foreclosure,' said Ms Dana Johnson, an economist with Comerica Bank.

With about 40 per cent of new mortgages in the past year being made to sub-prime borrowers, as interest rates have been rising and house prices stagnating, many sub-prime mortgages may be headed towards foreclosure, but they represent only a small proportion of the US$9 trillion (S$13.7 trillion) worth of US home mortgages outstanding, and about US$5 trillion of mortgages outstanding have been securitised.

'If we're talking about the sub-prime industry, I think there is a compelling and distressing story to be told,' said Mr Richard DeKaser, an economist with financial holding company National City Bank.

'But if we're talking about the housing market or the US economy as a whole, I think its role has been over-amplified.'

In the context of a US$13 trillion US economy, this is just 'indigestion', said Mr Ken Fisher, chief executive of Fisher Investments in Woodside, California.

'At most it slows the growth rate. It doesn't stop the growth rate or create a recession,' he said.

Moreover, troubles for sub-prime mortgage borrowers will be mitigated by a strong jobs market, said economist Ryan Ratcliff of the UCLA Anderson Forecast.

'It's hard to predict a major surge in foreclosures without major job losses,' he said.

The US economy created more than 150,000 jobs a month in four of the past five months and the unemployment rate fell to a five-month low in March.

'A very sensitive indicator of sentiment is the stock market and it seems to have regained its composure,' said Comerica Bank's Ms Johnson.

The US stock market's rebound in the past three weeks from the four-month lows seen in early March was helped by the confidence expressed by Federal Reserve chairman Ben Bernanke, that the sub-prime mortgage market's troubles will be contained.

'I don't think Bernanke would glibly deny this problem,' said Mr Fritz Meyer, senior investment officer at AIM Investments.