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Thursday, December 27, 2007

John Berry: Subprime Fallout Won't be as Bad as Some are Predicting

John Berry says losses from the subprime mess will be big, but "not nearly enough to sink the U.S. economy":

Subprime Losses Are Big, Exaggerated by Some, by John M. Berry, Commentary, Bloomberg: As the U.S. savings and loan crisis worsened in the 1980s, analysts tried to top each other's estimates of the debacle's cost... Much the same thing is happening now with losses linked to subprime mortgages, with figures of $300 billion to $400 billion being bandied about.

A more realistic amount is probably half or less than those exaggerated projections -- say $150 billion. That's hardly chicken feed, though not nearly enough to sink the U.S. economy. ...

There are two reasons why the losses aren't likely to be so large.

First, the mortgages are backed by collateral, a house or condominium, and in a foreclosure a home typically retains significant value. When it is sold, the lender often will get 50 percent to 60 percent or more of the loan amount after foreclosure expenses.

Second, most subprime borrowers aren't going to default. ...

What does that mean for the broader economy, particularly consumer spending? ...

The economic repercussions of the housing bust and mortgage woes are limited to a great extent because less than half of American families own a home with a mortgage... Almost a third of all families rent their house or apartment, almost a fourth own and have no mortgage and the vast majority with a mortgage are current in their payments.

Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3 percent -- own a home in foreclosure...

Comparisons in dollars of constant value between likely subprime losses and those incurred during the S&L crisis indicate the 1980s hit was significantly greater, though the current episode still has a long way to run. ...

    Posted by on Thursday, December 27, 2007 at 12:15 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (20)

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