The stock market has been on a roller coaster the last week or so due to investor jitters over the possibility that a lot of lending institutions which make home mortgage loans to buyers with modest resources and bad credit (called sub-prime loans) are finding that defaults on those loans are rising. If these institutions have to foreclose on the debt they'll lose money and have less to lend which means business expansion will suffer.
Jerry Bowyer thinks the fears are overblown and puts the matter of sub-prime mortgages in perspective in a helpful column at National Review Online:
Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.
So, all in all, when you work through the details and get down to the number that really matters, only about 0.6 percent of U.S. mortgages are currently in foreclosure. That's up a hair from roughly 0.5 percent last year. That's it.
Actually,...things are better than the numbers suggest, since sub-prime-mortgage homes are less expensive than prime-mortgage homes. This makes sense. Wealthier people, generally, can afford costlier homes than less-wealthy people. The recent sub-prime surge brought large numbers of moderate-income families into the home-ownership market, and their houses are less expensive than most. Therefore, the dollar impact of the sub-prime default is smaller than if it were a prime default.
With approximately 254,000 mortgages in foreclosure at the moment - up from roughly 219,000 last year - the sub-prime meltdown has given us an increase of 35,000 mortgage foreclosures over the last quarter. Since the average sub-prime mortgage clocks in at almost exactly $200,000, we're looking at an approximate $7 billion increase in foreclosed value in the first quarter of this year.
Household net worth in the U.S. is about $53 trillion. In other words, the recent increase in sub-prime foreclosures amounts to 0.01 percent of net U.S. household wealth.
So, according to Bowyer, sub-prime foreclosures are not that big a deal to the American economy and sooner or later, we assume, the Market is going to realize this and settle down. Let's hope he's right.
RLC
