We already know that in 2007, each quarter we had about $45 billion in loans re-adjust. We know that in 2008, that number will climb to $90 billion per quarter - double it's 07 number. But what isn't being talked about, and should be, is the truth behind who got these loans and why they may not be such a high risk afterall.
We assume that if the loan is a subprime loan, it must be "owned" or secured by a subprime borrower, yes? Not true. In 2005, the height of the subprime loans, 55% of subprime loans went to individuals that would have qualified for a conventional loan. Why? Banks were pushing the more creative-type financing on all individuals due to the higher profit margins, and people wanted flexibility and lower payments. Some needed this just to qualify for a home due to the rising prices.
Subprime usually means a credit score below 620. However, 55% of people who got subprime loans in 2005 would have qualified for conventional mortgages. Perhaps they wanted the flexibility of pay option ARMS, or they wanted interest only loans that weren't available on conventional type mortgages. But, they're paying for that decision now as their rates climb higher.
What's the upside to this? That the subprime crisis may not be as bad as we thought. There is a good chance those 55% of people CAN afford their mortgage, so the crisis next year, despite the number of loans in billions of dollars doubling, may not be as bad as we think. We won't know until it happens, but it's worth considering.
Dani
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