How bad is the subprime crisis?
This from today’s New York Times, in the wake of the Swiss bank UBS announcing huge write-downs related to subprime mortgage:
Banks worldwide have announced more than $135 billion in credit losses and write-downs since the turmoil in the U.S. housing market started last year, and some analysts estimate that total write-downs could reach $800 billion.
$800 billion? How many subprime loans got made? According to the Center for Responsible Lending, there are $1.3 trillion in subprime loans outstanding. Almost $1 trillion of that came since 2003. Of homes foreclosed on in 2006, 93 percent had subprime mortgages.
At the moment, though, there are only 14.5 percent of subprime mortgage holders in default, according to the Federal Reserve Bank. Since the subprime crisis has been the source of $135 billion in write-downs already, that reflects about 10 percent of the outstanding loans in the subprime market (along with some sloppy regular lending that’s certainly getting lumped in). Getting to $800 billion suggests that the market believes somewhere in the vicinity of 80 percent of subprime loans made in the last four years will go bad, perhaps because a minimum of 89 percent have ‘exploding’ interest rates attached to them.
The real estate market was like a rocket for the last six years. It’s now going boom, in slow motion.