Mortgage mess unlikely to break economy

The news on subprime lenders keeps getting worse.

These companies, which focus on customers with poor credit, often make loans with adjustable rates. When short-term interest rates rose in 2005 and 2006 and the housing market started to weaken, many loan rates adjusted up. Subprime borrowers faced higher payments for homes that weren't worth as much. Result: The number of subprime mortgages failing to be paid on time rose 13 percent to 13.3 percent in the fourth quarter of 2006 vs. the year earlier and 2 percent of subprime mortgages are now in foreclosure.

However, while stocks of subprime lenders have been pummeled, the industry's effect on the broader market is likely to be muted. "All told, subprime mortgages are worth about $640 billion, and that isn't chump change," says Bob Gay, economist and managing partner of Fenwick Advisers. "However, it's only 0.6 percent of annual gross domestic product. ... On the consumer side, it's not like every subprime mortgage is going to default and get repossessed."

Lenders would like to minimize foreclosures, which are time-consuming, and focus on their highly profitable core business.

Doug Duncan, chief economist with the Mortgage Bankers Association, says mortgage lenders are already moving to get people into more suitable loans. "It's just good business," he says.