Sub-prime

When the world markets slid last week, one of the reasons suggested for the slide was nervousness centering on the collapse of the sub-prime mortgage market in the United States.

Now, what is a sub-prime mortgage market? According to definitions, this market is for borrowers with poor credit histories who normally cannot qualify for mortgage loans. A whole industry has emerged in the United States to serve Americans with credit problems. Even non-banks have been moving into the business of providing credit to these people.

For months already, there has been a steady increase in news that this sub-prime mortgage market in the US was ready for a meltdown. And when it does, doomsayers are saying that it will affect the whole housing sector there.

But what is the ratio of the US sub-prime mortgage market when compared to their mortgage industry as a whole? I was talking to a fund manager here last weekend and his ballpark estimate was between five to 10 per cent. But according to the Mortgage Bankers Association, the sub-prime market made up 13.6 per cent of the total in 2006.

But the interesting question is, should we be worried here? In the US, there is still optimism. Some analysts are saying that other segments of real estate there – from farmland to office buildings – are healthy. Delinquent loans of America’s 100 largest banks is only 0.45 per cent, lower than at any time since 1995.

But the pessimism in me says that we should still be on our guard though we are halfway around the globe. Who knows… perhaps this sub-prime mortgage problem has yet the potential to spread and affect the world markets. It’s not only China’s new sneeze that is dreaded. America’s old sneeze is to be feared too. Let’s be careful, that’s all I say.


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