home subscribe advertise reprints e-mail help RSS about us LOG IN

Mortgage News


Mortgage News

HOT Topics









site map

twitter linkedin
facebook google+

Mortgage News

News by Subject
Complete list of specialty news sections.

Purchase Subscription
Subscribe to MortgageDaily.com and get immediate access to all news, statistics and archives.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Consumer Mortgage News
Free mortgage news for prospective borrowers.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from MortgageDaily.com.

Mortgage News Reprints
Put entire MortgageDaily.com stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed MortgageDaily.com stories free on your Web site or for your RSS reader.

News Archives
Archive of MortgageDaily.com stories by month going back to 1999.

Press Releases
Reports and announcements from MortgageDaily.com.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Directories
Directories of lenders, branch operators and mortgage service providers.

Mortgage Graphs
Directories of lenders, branch operators and mortgage service providers.

Nonprime and Subprime News | Subprime Statistics
Stories about non-QM products. Coverage of subprime, Alt-A and
hard money lending. Home-equity loans and home-equity lines of credit.

Subprime Debacle to Shrink US. Credit by $2 Trillion

Monetary Policy Forum report

March 3, 2008


Outstanding credit in the United States will contract by around $2 trillion as a result of the subprime mortgage market meltdown, a new study estimates.

International losses from the mortgage crisis are estimated at $400 billion, according to Leveraged Losses: Lessons from the Mortgage Market Meltdown issued by the U.S. Monetary Policy Forum Conference Friday. About half of those losses are expected to be borne by U.S. financial institutions with exposure to mortgage securities.

The report was prepared by David Greenlaw, chief U.S. fixed income economist, Morgan Stanley; Jan Hatzius, chief U.S. economist, Goldman Sachs; Anil Kashyap, professor of economics and finance, The University of Chicago Graduate School of Business; and Hyun Shin, professor of economics, Princeton University

"Our baseline estimates imply just under a $2 trillion contraction in intermediary balance sheets, of which roughly $900 billion would represent a decline in lending to households, businesses and other non-levered entities," the authors wrote.

As subprime mortgage originations slowed, other sectors of the mortgage market were impacted. Jumbo loans, which account for 17 percent of the dollar value of all first-lien U.S. mortgage debt, went from a spread of between 20 to 40 basis points over conforming mortgages before August 2007 to around 100 BPS subsequently.

The report noted the London Interbank Offered Rate serves as an adjustable-rate index for most U.S. subprime loans.

Until recently, losses on subprime mortgages were estimated based on historical data. Forecasts would extrapolate data from earlier vintages, which didn't experience falling home prices.

"It is likely that simply extrapolating from the historical progression of defaults and losses will produce an overly optimistic picture," the report said. "We suspect strongly that defaults on the 2006 vintage will not just grow in line with the progression observed in the past, but that the rise in defaults will exceed the historical norm, perhaps by a considerable margin."

Based on a 15 percent home price decline, about $2.6 trillion in mortgages would be in a negative equity position, the authors explained. And borrowers who have less equity or negative equity have fewer options to deal with defaults.

Using an estimate of subprime losses from Goldman Sachs of $243 billion and factoring in "negative equity dynamics," credit losses could reach as much as $400 billion. When factoring Alt-A and jumbo losses, credit losses could be well above $400 million.

When home prices previously fell in the states of California, Massachusetts, and Texas, they fell by about 10 percent to 15 percent. Foreclosures kept rising until prices bottomed out, then took another three to six years to normalize.

But since credit standards were much looser during recent years than in prior real estate market declines, the national foreclosure rate could be tripled over the next few years. The authors suggested foreclosures could go from 0.4 percent in mid-2006 to 1.2 percent by next year. Most of the anticipated foreclosures will be from the current stock of loans, as loans made after 2007 will reflect far tighter credit standards.

Foreclosures will start on an estimated $1.5 trillion of the current book -- though only about 57 percent of all filings will end in repossessions. This level of foreclosures translates into credit losses of around $400 billion -- of which around half will be suffered by U.S. institutions.

As institutions expanded their balance sheets, unqualified borrowers were granted easy credit as companies had intense urges to employ surplus capital. But in downturn of the credit cycle, the opposite occurs.

Estimated write-downs so far of $120.9 billion have been offset by $75 billion in recapitalization from sovereign wealth funds.

The report indicated about $20.5 trillion in total assets at leveraged institutions. Leverage ratios varied at these companies from 8.4 at savings institutions and credit unions to 24.7 at Fannie Mae and Freddie Mac to 31.6 at hedge funds and brokers.

Factoring in all these figures, the report concluded balance sheets will likely decrease by about $1.98 trillion.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

Corporate Mortgage News
M e r g e r s, a c q u i s i t i o n s and private and public offerings. Other corporate activity including executive appointments, bankruptcies name changes.

SUBSCRIBERS: Edit Subscription | Subscription Help | or call 214.521.1300

Subscribe Contact Us Site Map

Copyright © 2017 Mortgage Daily, D a l l a s
Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

p r i c i n g engine directory

wholesale lender directory

More Mortgage News Resources (full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter


mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

real estate news

refinance news

reverse mortgage news

secondary marketing

social media

servicing news

subprime news

wholesale lenders