How Bad is the Sub Prime Mortgage Mess? When you look at the numbers, that is.
Every banking crisis we have ever experienced has its roots in the unchecked explosion of credit, this occurs without regard to people's ability to pay off the debt or a reasonable risk assessment.
Lately we hear about how the poorly administered loans in the subprime mortgage mess has cripled many credit markets in the United States. Well, I'm not so convinced that these bad loans are the culprit. Maybe they are just a convenient target. After all, the public always wants to find a bad guy to blame. According to the Federal Reserve, only 14% of the total mortgage market is categorized as subprime.
So what do the numbers actually tell us?
How many defaulted mortgages are there truly?
How many more mortgages should we expect to default?
It's really some simple accounting. The article written by former hedge fund manager and Wall Street analyst, Tom Brown maps the data out logically. He calculates a loss rate that tells us what % of the mortgages out there will default.
He looked at securitized trust data (who service these loans) and divided the loans that make up the various indices into three categories.
1. Those that are already a loss.
2. Those that look like they're going to be a loss (because there are seriously past due which means more than 60 days.)
3. Those that are going to soon jump in the acid pool of bad loans. This one has to be estimated based on data.
The statistics show that based on these categories:
1. 2.8 % of the sub-primes mortgages are in category one (i.e. already a loss which means already defaulted).
2. 7.5 % of the 60 day deliquent sub-primes will become toast (i.e. go into default).
3. Only 2.9% of category three (those that are estimated to become bad in the near future) will become a default.
http://seekingalpha.com/article/84192-consensus-subprime-mortgage-loss-estimates-mathematically-impossible
That totals to 12.7% of the total subprime pool.
Other Estimates?
The Center for Responsible Lending, a nonprofit, nonpartisan research and policy organizatione, stimates that 15.6% of the subprime mortgages issued since 1998 will end in foreclosure.
http://www.responsiblelending.org/index.html
Okay so we have two estimates for what percent of the Sub-prime pool will go bad from two different sources. One says, 12.7% and the other says 15.6%. Since 15.6 is the gloomier of the two, lets run with that one.
Since the Sub-prime lending took off at the end of 2005, lets use the beginning of 2005 as our basis for tallying the total number of subprimes. If you figure that about 3.2 million subprime loans are issued each year that totals to 9.6 million subprime loans from 2005 to present.
if we multiply this by the 15.6% number we get 1, 497,600
So that is the estimated number of loans that are toast (i.e. bad loans, pay attention).
Now we are told that Congress needs to pump in $700 billion to bail out banks in the current credit mess. Well let's do that math.
If we divide (the bailout amount) by (the number of bad loans) then we come up with an estimate of how much each bad loan was for. That is, we can calculate an average loan amount.
The Per Loan Amount that was handed over by subprime lenders....
Drum Roll ...........
700,000,000,000 divided by 1,497,600 = $467,414
that means that the average loan amount for each loan was $467,414.
Yep that means that people with poor credit were loaned an average of $467,414 to buy a house.
Uh......Yeah......sure.
How about the theory that maybe these banks have some other losses that they aren't telling us about. In other words, the conclusion is obvious that the sub-primes are a scapegoat. We need a bad guy to point the finger at. The truth is that there are other financial instruments that underly the credit crisis.
But then again, math was never my strong suit.
Lately we hear about how the poorly administered loans in the subprime mortgage mess has cripled many credit markets in the United States. Well, I'm not so convinced that these bad loans are the culprit. Maybe they are just a convenient target. After all, the public always wants to find a bad guy to blame. According to the Federal Reserve, only 14% of the total mortgage market is categorized as subprime.
So what do the numbers actually tell us?
How many defaulted mortgages are there truly?
How many more mortgages should we expect to default?
It's really some simple accounting. The article written by former hedge fund manager and Wall Street analyst, Tom Brown maps the data out logically. He calculates a loss rate that tells us what % of the mortgages out there will default.
He looked at securitized trust data (who service these loans) and divided the loans that make up the various indices into three categories.
1. Those that are already a loss.
2. Those that look like they're going to be a loss (because there are seriously past due which means more than 60 days.)
3. Those that are going to soon jump in the acid pool of bad loans. This one has to be estimated based on data.
The statistics show that based on these categories:
1. 2.8 % of the sub-primes mortgages are in category one (i.e. already a loss which means already defaulted).
2. 7.5 % of the 60 day deliquent sub-primes will become toast (i.e. go into default).
3. Only 2.9% of category three (those that are estimated to become bad in the near future) will become a default.
http://seekingalpha.com/article/84192-consensus-subprime-mortgage-loss-estimates-mathematically-impossible
That totals to 12.7% of the total subprime pool.
Other Estimates?
The Center for Responsible Lending, a nonprofit, nonpartisan research and policy organizatione, stimates that 15.6% of the subprime mortgages issued since 1998 will end in foreclosure.
http://www.responsiblelending.org/index.html
Okay so we have two estimates for what percent of the Sub-prime pool will go bad from two different sources. One says, 12.7% and the other says 15.6%. Since 15.6 is the gloomier of the two, lets run with that one.
Since the Sub-prime lending took off at the end of 2005, lets use the beginning of 2005 as our basis for tallying the total number of subprimes. If you figure that about 3.2 million subprime loans are issued each year that totals to 9.6 million subprime loans from 2005 to present.
if we multiply this by the 15.6% number we get 1, 497,600
So that is the estimated number of loans that are toast (i.e. bad loans, pay attention).
Now we are told that Congress needs to pump in $700 billion to bail out banks in the current credit mess. Well let's do that math.
If we divide (the bailout amount) by (the number of bad loans) then we come up with an estimate of how much each bad loan was for. That is, we can calculate an average loan amount.
The Per Loan Amount that was handed over by subprime lenders....
Drum Roll ...........
700,000,000,000 divided by 1,497,600 = $467,414
that means that the average loan amount for each loan was $467,414.
Yep that means that people with poor credit were loaned an average of $467,414 to buy a house.
Uh......Yeah......sure.
How about the theory that maybe these banks have some other losses that they aren't telling us about. In other words, the conclusion is obvious that the sub-primes are a scapegoat. We need a bad guy to point the finger at. The truth is that there are other financial instruments that underly the credit crisis.
But then again, math was never my strong suit.
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