Originally published August 10, 2007 at 12:00 AM | Page modified August 10, 2007 at 2:05 AM
Subprime market: small segment, big impact
Given all the financial turmoil blamed on subprime mortgages this year, it's easy to forget that they are a small slice of the mortgage...
The Philadelphia Inquirer
PHILADELPHIA — Given all the financial turmoil blamed on subprime mortgages this year, it's easy to forget that they are a small slice of the mortgage market.
For starters, about a third of the nation's 75 million homeowners have no mortgage.
Of the $9.8 trillion in outstanding residential mortgage debt at the end of March, 13 percent — or $1.27 trillion — was in the hands of subprime borrowers.
And of subprime borrowers, 13.3 percent were behind on their payments, according to the Mortgage Bankers Association.
If losses reach $113 billion this year and next, as Mark Zandi, chief economist at Moody's Economy.com, predicted, that would still be just 1 percent of the overall mortgage market.
Even so, "It's big enough to be a catalyst for investors to re-evaluate the risks they've been taking," Zandi said. "The financial impact is bigger because investors overstepped so far in so many markets."
Investor appetite for risk enabled subprime and Alt-A — or minimally documented — mortgage lending to explode from $215 billion in 2001 to $1 trillion in 2005, according to Inside Mortgage Finance. That happened in a symbiotic relationship with soaring house prices, particularly in Arizona, California, Florida and Nevada.
"They are absolutely linked. Without subprime, there is no bubble," said Susan Wachter, a professor of real estate at the Wharton School of the University of Pennsylvania.
And now, it is going to take a long time to recover.
Zandi predicted that average house prices nationwide will fall 10 percent from their peak in late 2005 to their trough in the middle of next year.
It will take years to unwind the financial knot of mortgages wrapped into debt securities that are now buried deep inside hedge funds and foreign-investment vehicles.
Subprime lending did not start out as a monster that laid waste to the equity of homeowners and the market value of lenders.
![]()
It has been around for a long time in the form of equity-based lending — which means that loans are based on the value of property rather than the quality of a borrower's credit — said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md.
Using their experience with credit cards, lenders adapted the use of the credit score to subprime-mortgage lending. That gave them the confidence to put a price on the higher risk of subprime lending.
In 2004, subprime-mortgage lending exploded from 8 percent of the mortgage market — where it had been for years — to 18 percent, said Cecala. It climbed to 20 percent in 2005.
"What happened is that mortgage lenders started digging a lot deeper" for potential borrowers to make loans that could be sold on Wall Street, said Cecala.
The game is over for now.
"We've entered a period of uncertainty," said Gordon Fowler, chief investment officer at Glenmede Trust of Philadelphia. "We're not going to know who is holding the bag for quite some time."
Copyright © 2007 The Seattle Times Company
Nintendo re-enlists Mario, savior of video-game industry
Verizon-Frontier deal stirs concern among consumers
Brier Dudley: 'Guitar Hero' founder excited about future
Gaps for consumers in Democrat health care bills
Hutch gets $10M from Bezos family for immunotherapy research

Real Salt Lake wins MLS Cup
Real Salt Lake defeated the Los Angeles Galaxy with penalty kicks after 120 minutes of play at Qwest Field in Seattle.
general classifieds
Garage & estate salesFurniture & home furnishings
Sporting goods
just listed
42" Hitachi Plasma 1080i - $500
8 Drawer Dresser with Attached Mirror - $200
8 seat pecon formal dining table and china hutch - $1500
More listings
POST A FREE LISTING
shopping
Give yourself a treat and visit Watson Kennedy's Holiday Open Houses
More minding the store
events for Monday, Nov. 23
- Castle Discount with Military ID
- CraftsGiving
- Alhambra 20 Percent Off Jewelry Sale
- Dish It Up! Totally Truffles
editors' picks
- Phinney Ridge & Greenwood shopping
- Independent video stores
- Pioneer Square shopping
- Garden furnishings
- 'The Road' takes Viggo Mortensen to Mount St. Helens and Astoria, Ore.
- Tugboat sinks at Seattle waterfront pier
- Illegal workers quietly let go
- Child-support error costs nearly $21,000
- Vikings easily beat the Seahawks
- Craigslist adoption ad: A plea by young mother-to-be? A scam?
- Chase shrugs off loss of CD investors
- Woman stabbed by stranger in North Seattle
- Snow piles up on Cascade slopes
- Denny Triangle gains skyline, but tenants slow to come
- Illegal workers quietly let go
374 - Climate change speeds up since 1997 Kyoto accord
210 - Vikings easily beat the Seahawks
171 - Metro won't cut bus service after all
156 - New Husky recruit: Enes Kanter
98 - Historic health care bill clears Senate hurdle
95 - Tattoos at Mill Creek Church pierce skin, soul
83 - Middleton says Huskies "plan on scoring at least 50 points'' Saturday
82 - Jerry Brewer: Seahawks can't lean on the Hutch Crutch now
74 - Seattle woman charged with knife attack on boyfriend's ex
66
- Sprouts, raw fish on attorney's 'do not eat' list
- Tattoos at Mill Creek church pierce skin, soul
- Food-safety lawyer's wish: Put me out of business
- Illegal workers quietly let go
- Architects, chefs find 'kid' within to build Gingerbread Village
- Rediscovering Moab, 'the most beautiful place on Earth'
- It's possible to recover a life lost to hoarding
- Child-support error costs nearly $21,000
- 'The Road' takes Viggo Mortensen to Mount St. Helens and Astoria, Ore.
- Taste | The Great Pie Bake-off pits friends and fruit

