Bad Credit Mortgage Problems Contained, Some Experts Believe

Defaults in the home mortgage market and across the U.S. have generated a lot of media buzz, but the vast majority of owners with mortgages are still repaying their loans, and their consumer spending dwarfs that of subprime borrowers.

Subprime (or bad credit mortgages) issued to the less credit worthy borrowers comprised only 13.7 percent of outstanding mortgage debt in the fourth quarter of 2006, and their delinquency rate was 13.3 percent.

The subprime mortgage market now is “little more than an asterisk in the overall U.S. credit economy,” said Roth Capital Partners’ Donald Straszheim.

“It’s the latest episode of housing hysteria,” said Sean Snaith of the University of Central Florida’s Institute for Economic Competitiveness.

“It’s a small segment of the overall mortgage market,” Snaith said. “Its problems are not akin to a currency crisis where there is some contagion that just ripples through an economy.”

By contrast, some argue that with this mounting home loan crisis, a huge problem is in the making and federal government action is needed.

A week after a coalition of civil rights groups called for a six-month halt to home loan foreclosures on subprime borrowers, U.S. Senate Democrats called for the government to bail out troubled bad credit mortgage loan holders Wednesday.

“The federal government can send in an infusion of (money) to prevent foreclosure,” said U.S. Sen. Charles Schumer of New York, citing the possibility of the economy losing “hundreds of millions of dollars.”

Such intervention may not be necessary, others believe.

“It’s easy to build a domino theory for this,” Milton Ezrati, an economist with fund manager Lord Abbett, said. “There is a risk but I don’t see it as likely.”

With demand for homes sluggish and so much property already for sale, it is doubtful that any major mortgage lender is in hurry to foreclose.

“It’s in everybody’s interest, both the borrower and the lender, to find a way to avoid foreclosure,” said Dana Johnson, Comerica Bank economist.

With about 40 percent of new mortgages in the past year made to so-called bad credit borrowers, as mortgage rates have been rising and home prices stagnating, many subprime mortgages may be headed toward foreclosure.

But mortgage refinancing is still a possibility for many, and overall, they represent only a small proportion of the $9 trillion U.S. mortgage market.

Moreover, about $5 trillion of outstanding home mortgages have been securitized.

“If we’re talking about the subprime industry I think there is a compelling and distressing story to be told,” said Richard DeKaser, an economist with financial holding company National City Bank.

“But if we’re talking about the housing market or the U.S. economy as a whole, I think its role has been over-amplified.”

Continue reading this article by Reuters …